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Bank of England maintains Bank Rate

2016-07-16


The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target and in a way that helps to sustain growth and employment.  At its meeting, the MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%, with one member voting for a cut in Bank Rate to 0.25%.  The Committee voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion. 

Committee members made initial assessments of the impact of the vote to leave the European Union on demand, supply and the exchange rate.  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.  The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round.

Financial markets have reacted sharply to the United Kingdom’s vote to leave the European Union.  Since the Committee’s previous meeting, the sterling effective exchange rate has fallen by 6%, and short-term and longer-term interest rates have declined. 

Reflecting the fall in the level of sterling, financial market measures of inflation expectations have risen moderately at short-term horizons, but only to around historical averages, and have fallen slightly at longer horizons.  Markets have functioned well, and the improved resilience of the core of the UK financial system and the flexibility of the regulatory framework has allowed the impact of the referendum result to be dampened rather than amplified.

Against that backdrop, at its meeting ending on 13 July, the majority of MPC members judged it appropriate to leave the stance of monetary policy unchanged at present.  Gertjan Vlieghe preferred to reduce Bank Rate by 25 basis points at this meeting.