Following the decision of the Bank of England to keep interest rates at 0.5%, here are the latest comments from the industry.
Towry
Andrew Wilson, head of investments: “The MPC of the Bank of England has decided not to cut interest rates, instead preserving what little dry powder it has left. The market had been almost certain of a rate cut, particularly given Mark Carney’s downbeat comments both pre and post the EU Referendum. However perhaps there was a sign in that sterling had been on the rise all morning, and it has initially spiked higher on this news.
“The previously rampant FTSE 100 has had the wind taken out of it sails on the news that the BOE is standing pat, and this has also impacted European markets. Equities had been rallying on hopes of central bank stimulus, including from the Bank of Japan, but for now it may have been better to “buy the rumour”. To what extent stock markets stabilise and start appreciating again well suggest to the extent to which gains had been driven speculators or longer term investors.
“Cutting from 50bps to 25bps would have been unlikely to have made much of a difference to anything, and you can’t force people to borrow. That said, there may have been some psychological benefit in the sense that the Bank of England would have been proving responsive to post Referendum economic issues. A cut in August is now very much on the cards though.
“Carney is not a fan of negative rates so it is unlikely that we will see that in August, indeed he may wish to avoid cutting to zero too. In which case, he has 25bps of potential cuts then the next item in his tool kit would be a return of quantitative easing.”
Hampshire Trust Bank
Mark Sismey-Durrant, Chief Executive Officer: “While many were expecting interest rates to be cut, it seems the market must continue to wait for the Bank of England to put measures in place to stimulate the UK economy following the EU Referendum. During this period of economic upheaval, SMEs and consumers alike should remain steadfast about the UK economy and have confidence that it will recover in the longer-term. Both companies and consumers need to be shopping around for a savings account that delivers a consistent and competitive level of interest. By doing so, they can continue to invest their money and find opportunities to grow their money for the future.”
Kensington
Steve Griffiths, Head of Sales and Distribution: “It’s no surprise that the base rate continues to remain at its historic low level this month, given the current uncertainty in the financial markets. It’s likely that this uncertainty will continue to linger over the coming weeks and months, and we could even see rates fall further.
“In this environment of change, it’s important that advisers use every opportunity they can to contact their books and offer advice to their clients. That not only means speaking to customers who meet the standard mortgage criteria, but also those whose financial circumstances could prevent them from going to high street lenders. This group, in particular, will need expert advice to successfully navigate the mortgage market during these uncertain times.”
Close Brothers Asset Management
Nancy Curtin, Chief Investment Officer at: “Increased political clarity has lessened the immediate need for the Bank of England to leap into action, as markets have calmed. Mark Carney has already been clear he is committed to providing liquidity if required, and loosening capital buffer requirements at banks. However, he is clearly keeping further monetary policy powder dry until it is most needed, should we start to see a meaningful slowdown.
“Monetary policy can only do so much. A new fiscal strategy from a new Chancellor, alongside business-friendly Brexit negotiations will be crucial to supporting growth in the medium-term. Clarity over the next Prime Minister has already soothed markets, and further signs of action should have a similar effect.”
ThinCats
Kevin Caley, Founder and Chairman: “The Bank of England may have kept interest rates at 0.5% for the time-being, but a rate cut to stimulate the economy and free up money for lending seems inevitable. When this happens, it will be miserable news for Britain’s hard-pressed savers, who have been earning dismal returns on their money since the financial crisis.
“In such uncertain economic times, the prospect of interest rates returning to pre-crisis levels any time soon is highly unlikely and anyone with money in the bank should be rethinking their savings plans.”
Hargreaves Lansdown
Ben Brettell, Senior Economist: “Mark Carney had seemingly backed himself into a corner with his speech in the immediate aftermath of the referendum. So strong were his hints that looser monetary policy was on the way, that the market had come to fully expect a 25 basis point cut today.
“As such financial markets have reacted with surprise to the decision to hold rates. The FTSE 100 dropped 60 or so points on the news to leave it flat on the day. Sterling was the main beneficiary, gaining more than a cent against the dollar.
“To an extent the Bank is guessing here, as there has been no hard economic data since the Brexit vote to indicate how bad any slowdown might be. Survey data shows business and consumer confidence have taken a severe knock – in July, GfK’s consumer sentiment index suffered its biggest monthly decline since 1994. However the preliminary estimate of Q3 GDP isn’t due until 27 October, so it is easy to see why the MPC might want to wait until a clearer picture emerges before taking any action.
“Nevertheless it looks almost certain that looser policy will be necessary at some stage to counteract the economic uncertainty posed by the Brexit vote. Today’s minutes stated most committee members expect monetary policy to be loosened in August, when the bank will update its economic forecasts. Interestingly the minutes appear to open the door to more QE, noting that “the precise size and nature of any stimulatory measures” is yet to be determined. Could this be a hint that some members favour measures over and above an interest rate cut?
“So what does all this mean for savers and investors? Despite today’s decision, the referendum result has kicked the prospect of higher returns on cash into the seriously long grass. Rates could conceivably remain at rock bottom for the next five to ten years. Clearly this is good news for those with variable rate mortgages, but savers hoping for a return to the ‘normal’ rates seen pre-crisis will be waiting a long time. With gilt and corporate bond yields also ultra-low, I expect savers and investors’ capital will ultimately be committed to equities in search of higher yields.”
State Street Global Markets
Michael Metcalfe, head of Global Macro Strategy: “There are two surprises here. The first is that interest rate markets had forecast more than a 70 percent chance of a cut. But the bigger surprise is the second one, namely that the Bank of England was ready to disappoint market expectations so soon after the Brexit vote. While a rate cut can still come at the next meeting, the delay hints at concern about the inflationary impact of sterling weakness and some uncertainty as to how rapidly the economy will actually slow.”
State Street Global Advisors
Bill Street, head of Investments EMEA: “Although the Monetary Policy Committee (MPC) surprised many by remaining on hold, we still expect an easing of policy in the near future. The next MPC meeting will coincide with the publication of the latest Inflation Report, providing an ideal opportunity for the Bank to respond to the Brexit vote. We expect at least a rate cut on 4 August, with the MPC also considering other tools including a fresh round of quantitative easing.”
Investec Wealth & Investment
Darren Ruane, Head of Fixed Interest: “The Bank of England surprised investors today by not reducing the UK’s base interest rate to 0.25% from 0.5% or adding to its quantitative easing policy which is at £375 billion. Market implied interest rates were pricing in close to a 100% probability of a rate reduction while around half of economists expected a change. In some ways, the decision should not be a big surprise to markets because monetary policy committees prefer to make a change in months where there is a full review of growth and inflation figures, and this does not occur until the August meeting. In addition, the Bank may want to wait to see the immediate impact of Brexit before making any decisions.
“Only one MPC member – Gertjan Vileghe – dissented from the no change consensus and voted for a 0.25% rate cut. It is likely that markets will comprehensively price in the likelihood of a rate reduction in August.
“The immediate reaction in markets is that UK government bond yields are higher, the FTSE 100 has fallen back by around 70 points (1%) to overnight levels and Sterling has rallied against both the US Dollar and Euro.”
Landbay
John Goodall, CEO and co-founder: “Savers can breathe a sigh of relief – for now at least. The Bank of England may have opted against a knee jerk reaction to the Brexit decision, but it has made its intention to cut rates in the near future clear. Consumer confidence, already hit by political and economic uncertainty, may well suffer further over the coming months. Any future cut to interest rates will fire the starting gun for a ‘flight to quality’ as savers and investors shop around for a resilient, yet rewarding home for their money while they wait out Brexit uncertainty.”
deVere Group
Nigel Green, CEO: “Sterling jumped to two-week high and the UK’s blue chip index, the FTSE 100, retreats following the Bank of England’s unexpected decision today to keeps interest rates on hold for now.
“This follows the FTSE leaping up almost a full percentage point yesterday to reach a new 11-month high as Britain prepared to appoint Theresa May as David Cameron’s successor as Prime Minister.
“This illustrates the current level of volatility in financial markets in the post Brexit vote era.
“With the new Chancellor, Philip Hammond, flagging a possible six-year renegotiation period, with ground breaking decisions being made by the UK and the EU, and with those decisions having a far-reaching global impact, investors need to accept that significant uncertainty, which leads to market volatility, is here to stay. It is the new normal following Brexit.
“There are also other key geopolitical factors fuelling volatility and therefore potentially impacting investors’ finances. These include China’s economic growth, the possibility of Brexit contagion as other countries seek to exit the EU, the U.S. election, the failure of negative interest rates in Japan and the Eurozone to stimulate sustainable recovery, and the Fed’s nervousness over the U.S. economy.
“Investors have always faced some volatility but shifting fundamentals will continue to drive up volatility further in the markets for the foreseeable future.
“Not only do investors need to accept this, they need to embrace it. Volatility is good for markets and investors alike, because it generates important investment opportunities.”
LGIM
Senior European Economist Hetal Mehta said: “We expected that the Bank of England would hold rates for the time being. We believe it is too early for the Bank to have any meaningful data on how the economy and financial conditions are being affected by the confidence shock ensuing from the EU referendum outcome, and therefore too early to calibrate the appropriate policy response.
“We expect the Bank of England will make a more comprehensive assessment in August, and that in the coming months interest rates will be cut by 50bps and further measures such as QE and credit easing will be announced.”
Please see attached for our latest edition of Macro Matters which sets out our latest views on markets post Brexit:
- What is the outlook for the UK economy?
- What are some of the key political factors to consider?
- What are the implications for sterling?”
Phoebus Software
Richard Pike, sales and marketing director: “Today’s base rate hold went against expectation. I believe that the decision to hold was more to do with the fact that the Bank of England does not yet know enough about the economic effects of Brexit. The good news is that the pound should now strengthen even more than it has done in the past few days. This does not mean that there will not be a cut in the next month or two, as most members of the MPC expect monetary policy to be loosened in August, but the decision to wait may prove prudent as we have a new Chancellor in place and especially in light of recent comments from the new government that the intention is to scale back on austerity.”
M&G
Anthony Doyle, Investment Director: “Today’s decision by the Bank of England Monetary Policy Committee (MPC) came as a surprise to the market, which was pricing in an 83% chance of a rate cut to 0.25%. The decision to remain on hold this month was likely driven by the MPC’s desire to see some early economic data feed through after the referendum result. In our view, the MPC is likely to cut the Bank Rate in August alongside the release of its quarterly Inflation Report, which will include revised forecasts for UK growth and inflation, enabling the BoE to use this information to fully communicate to the market why it has decided to act.
“As a result of the economic uncertainty caused by the UK’s decision to leave the EU, we anticipate a contraction in business investment and household consumption. The UK labour market will also be adversely impacted and we expect the unemployment rate to rise as the economy slows and potentially enters into recession. As a result, we expect the MPC to ease monetary policy in August as part of a wider package of measures aimed at shoring up economic growth and support financial stability (such as lowering UK bank capital requirements announced on July 5 and additional macro prudential measures). This time around, the BoE might also include corporate bond purchases within a wider quantitative easing programme.
“Going forward, the BoE faces a huge policy challenge. If the MPC acts in August, it would be highly unusual for an inflation targeting central bank to be cutting rates in the face of higher inflation. We expect the pound to come under further pressure in the months ahead and expect that the MPC will continue to use monetary policy to support economic growth rather than target inflation. As a result, inflation is likely to rise and could breach the BoE’s inflation target of 2.0% in 2017. The BoE did a good job of retaining its credibility after the financial crisis in a similar stagflationary environment in 2010-11 but it remains to be seen whether the market will view the rise in inflation as temporary as it has done previously.
“Institutions such as the OECD and IMF have argued that now is a good time for the UK Government to step away from its fiscal austerity ambitions, statement with which new Chancellor Hammond seems to agree. The Government has the ability to borrow cheaply and at long maturities. It could use the proceeds from debt raising to stimulate the economy through spending on public investment projects. Quality infrastructure projects could help support future growth, boost competitiveness, increase employment, and deliver real benefits to the economy both immediately and over time. An announcement that the UK government is loosening the fiscal reigns would be more than welcomed by BoE Governor Mark Carney who recently stated “One uncomfortable truth is that there are limits to what the Bank of England can do.”
Hope Capital
Jonathan Sealey CEO: “The fact that base rate has been held today can only be a good thing. Theresa May’s appointment has already buoyed the markets and caused Sterling to bounce back a little. A base rate drop at this time would have indicated that the Bank of England thought that we were headed for recession which would have given out further negative messages to the markets at a time when things have been rallying. While there is no certainty that there will not be a base rate drop in August, it is a sensible decision to let the new cabinet form and allow the new Chancellor to decide what his policy will be before making any change to interest rates, with the powerful messages that gives off all around the world.”
