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Bank of England holds rate steady

Britain’s central bank surprised markets by choosing to wait and see how things develop before changing interest rates. Analysts expected a drop to offset the financial battering the country has weathered since Brexit.

Eight of the nine members of the Bank of England’s monetary policy committee, including Governor Mark Carney, voted to keep rates on hold at 0.5 percent.

Investors had expected further monetary policy easing in response to the financial battering that has resulted from last month’s Brexit vote in favor of the UK leaving the European Union.

London share prices fell on the news, even as the value of the pound on foreign exchange markets rose. Sterling rose as high as $1.3480 after the announcement, up more than 2 percent on the day, its strongest value since June 30.

Shares and sterling later reversed their direction a bit with expectations growing that the Bank of England will move to lower interest rates in August.

Surging sterling

Sterling had already received a boost this week by Theresa May becoming Britain’s new prime minister, which helped ease the political uncertainty that has dominated since Britain since the June 23 Brexit vote. Last week, sterling sat at a 31-year low of $1.2798.

The rise in sterling had only served to bolster the view that the BoE would cut rates this month, as the currency’s rise effectively delivered some monetary tightening in itself.

“With the stability we’d found, with the government reshuffle and Theresa May getting the top job, sterling’s position was strengthened, and therefore people were looking at a cut wiping that out, but the opposite happened,” said Chris Hawkes, a currency trader at ETX Capital in London.

“That’s why the upside move was quite severe,” he added, “it was a bit of a shock.”

The Bank of England’s statement said it was likely to deliver stimulus in three weeks’ time, possibly a “package of measures,” once it has assessed how the Brexit vote has affected the economy.

New finance minister

One key factor the Bank of England will be taking into account is the fiscal policy stance of the newly appointed Chancellor of the Exchequer – the UK’s finance minister – Philip Hammond.

Hammond signaled he would take a less aggressive approach to cutting the budget deficit than his predecessor George Osborne, who was dumped on Wednesday by Prime Minister Theresa May in her cabinet reshuffle.

“Markets do need signals of reassurance, they need to know that we will do whatever is necessary to keep the economy on track,” Hammond said.

“Of course we’ve got to reduce the deficit further, but looking at how and when and at what pace we do that … is something that we now need to consider in the light of the new circumstances that the economy is facing,” he added.

nz/jtm (AFP, Reuters)

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