The Monetary Policy Committee of the Bank of England decided yesterday to keep UK interest rates on hold, against market expectations that at least a 25 basis point cut was in store. There was also no additional use of the ‘extraordinary policy measures’ which are now established components of central bankers’ toolkits. While both possibilities had been touted by Governor Carney in the days following the EU referendum, only 1 committee member of 9 felt that action was required at the first available opportunity, with the remainder preferring instead to see if hard domestic economic data prints come in as bad as initial fears and post-referendum surveys forecast. The dovish tone to the minutes suggest that policymakers are still minded to ease in the coming months, but the result is that interest rates remain at 0.5% for now, itself a record low that many market participants felt at the start of the year would have been left behind.
Sterling has found some support as a result, especially against a backdrop of other leading interest rates firmly anchored in negative territory to stave off the threat of deflation. The yields available on gilts have tracked slightly higher too, but still lie at levels that suggest a challenging growth environment in the years to come. Equity markets appear to hold a more optimistic view, with even the domestically focused FTSE 250 Index less than 5% below its pre-referendum peak - possibly interpreting the MPC’s lack of action as a sign of strength. In fact, stock markets around the world have largely dismissed the UK’s political volatility as a local concern, swiftly rebounding whilst focusing on more traditional worries about China’s growth profile, and the sustainability of US corporate profitability. In other words, markets continue to climb the proverbial wall of worry.
We have not changed our portfolios as a result of the Bank’s decision, not least because the situation may change when the committee next meet in under three weeks’ time. If anything, we believe that this surprise decision supports our view that investors are best served by holding sensibly diversified portfolios which are built efficiently and according to their tolerance for risk, and allowing the benefits of investing to accrue through time.