Another week on and we continue to face more surprises following the UK’s vote to leave the European Union. Last Thursday the Bank of England (BoE) decided to keep interest rates on hold at 0.5%, despite strong expectations of a 0.25% cut.
No one knows the precise impact that Brexit will have on the UK economy, but the BoE has highlighted that business and consumer confidence has fallen significantly both before and since the vote. Specifically, data suggests that many businesses have frozen investment decisions and the fear is that this will lead to an economic slowdown and possibly a recession.
The rationale for an immediate cut in interest rates is that this would in theory mitigate any slowdown by encouraging spending and investment. So why has the BoE decided against such action? Essentially, it is on the basis that that the loss of confidence could prove temporary as the Brexit shock recedes. Nevertheless, the BoE has stated that it will do everything within its power to reduce the downside risks facing the UK and, unless there is some evidence that confidence is rebounding, a 0.25% interest cut seems likely in the coming months.
It remains difficult to predict how the economy will be affected by the Brexit vote, but unless rising inflation becomes a greater concern, the BoE looks set to keep interest rates “lower for longer” in the face of uncertainty. From an investment perspective, we would again highlight the importance of creating robust, diversified portfolios that are not overly sensitive to any one scenario in an uncertain environment.