Pound and FTSE Rally as BoE Keeps Interest Rates Unchanged
BoE keeps rates unchanged
In contrast to expectations, the Bank of England (or BoE) kept interest rates unchanged on July 14, 2016, in its first monetary policy meeting since the Brexit vote. The quantitative easing program was kept unchanged at 375 billion British pounds.
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The policymakers voted to maintain a waiting stance, as the vote by the MPC (Monetary Policy Committee) stood at 8–1 in favor of keeping rates unchanged at 0.5%.
Earlier last month, BoE governor Mark Carney stated that an increase in the quantitative easing program or a cut in interest rates might be warranted to bring the inflation rate in line with the central bank’s target of 2%.
The markets discounted a rate cut of 25 basis points by BoE due to uncertainty in financial markets and anticipation of slowness in the British economy following the Brexit vote.
What drove the BoE’s decision?
The British referendum led to losses in the financial sector as the pound fell tremendously versus the US dollar. The decision on July 14 may also have been driven by the decent performance of financial markets despite the immediate outflow of funds from equity and foreign exchange markets.
Also, it may be too early to speculate the medium- to long-term impact of the Brexit vote, so the central bank has remained silent.
Impact on the Market
The iShares MSCI United Kingdom ETF (EWU) rose by more than 1% on July 14 at 3:30 PM EST, while the iShares MSCI Eurozone ETF (EZU) rose by 1.4%. The British pound–US dollar exchange rate rose by 1.5%, while the pound-euro exchange rate fell by 1.2%.