The Bank of England has held interest rates at 0.75%, after a monetary policy committee (MPC) meeting that was pitched as on a ‘knife edge’.
Prior to the decision, investors had been unsure as to the Bank of England’s direction, pricing in only a 45% probability of an interest rate cut.
The pound jumped 0.4% against the dollar to $1.307 on the news. The MPC voted by a majority of seven to two to keep interest rates unchanged.
In its report, the MPC said it had seen signs of a pick-up in UK economic activity following the general election result, an emphatic win for the Conservative party.
‘Some survey indicators of output have increased recently, which could in part reflect a reduction in uncertainty, as well as potentially signalling a pick-up in growth in the near term,’ it said.
‘While a range of output surveys deteriorated in the fourth quarter of 2019, the few surveys which have been taken since the general election have generally picked up.’
But the Bank left the door open to an interest rate cut overseen by Andrew Bailey, who will succeed Mark Carney as governor in March.
‘Policy may need to reinforce the expected recovery in UK gross domestic product growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak,’ the MPC’s report read.
CJ Cowan, assistant portfolio manager at Quilter Investors, said the Bank’s decision ‘piles some pressure’ onto Bailey, ‘who may be compelled to cut at one of his first few meetings’.
‘With an economy growing below potential and inflation well below target it is likely just a matter of time before the Bank reduces rates,’ he added.
Matthew Cady, investment strategist at Brooks Macdonald, said the Bank was ‘putting a lot of faith in the post-election “Boris bounce”.’
‘If the economy continues to post below trend economic growth, this will only raise the risk of a much bigger cut needed to interest rates later this year, but that requires a degree of manoeuvre which arguably the Bank doesn’t have,’ he added.
But Joe Healey, investment research analyst at The Share Centre, argued the bank’s decision was ‘rational considering the limited monetary ammunition we already have’.
‘The bounce-back in purchasing managers’ index activity alongside the increased confidence of manufacturers post-election as indicated by the Confederation of British Industry survey, to me indicates an economy which is picking itself back up.’