At the start of this week there was a widespread expectation that the Bank of England would confirm an interest rate cut of the base rate to 0.25% at its regular meeting on Thursday. Even the Governor, Mark Carney, had given a broad hint last week by saying that ‘further policy easing’ was necessary. His comment had attracted some criticism that he was bouncing the other eight members of the Monetary Policy Committee (MPC) into a no-alternative rate cut.

The minutes of the MPC revealed that on Wednesday – before the announcement of Philip Hammond’s appointment as Chancellor – there was an 8-1 vote in favour of no change. Why were the predictions – and seemingly the Governor – wrong? There are a few possible answers:

• When Carney spoke last week, the outlook was that there would be no new prime minister until September, leaving everything on hold for two months. That had changed by Monday afternoon, with Theresa May’s sole challenger dropping out.
• The MPC will be meeting again in just three weeks’ time, when the Quarterly Inflation Report is due to be published. The combination of the Report and the extra time should allow the MPC to have a slightly clearer picture of how the economy is coping – after all the Committee was meeting less than a fortnight after the polls closed. The MPC minutes suggest action next month: ‘In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the Committee expect monetary policy to be loosened in August.’
• There is an economic argument that says considerable adjustment has already taken place without the Bank’s intervention. As many holidaymakers will soon learn to their cost, sterling has weakened sharply – down about 10% against the dollar and 9% against the euro before today’s non-announcement. Similarly, both short and long term interest rates have fallen since 23 June, witness the dramatic drop in gilt yields.
• There is an argument for ‘keeping powder dry’. With only two 0.25% cuts available before rates start to go negative, timing matters. In the past Carney has put his face against joining the Euro and Yen in the negative yield club.
• With interest rates so low, it is questionable whether a further 0.25% shaving would make that much difference to investment intentions. Until the economic outlook for the UK is clearer – which could be some long while – 25 basis points is unlikely to mark a tipping point for many corporate investment decisions.

COMMENT

It is now all wait for 3 August, when the MPC reconvenes. The one interest rate certainty remains that oft-repeated phrase, ‘lower for longer’.