The Bank of England’s decision to keep interest rates and QE on hold this month will surprise many, but this may be more a question of timing than policy direction, as the MPC minutes make clear. Understanding the business impacts of a changed political landscape will take some time, but will be critical to shaping monetary policy in the coming months.
The Bank has been rightly praised for increasing the frequency of its communication on its intended actions. It must continue to give clarity on its next steps, including the timing of new policy measures, such as any expansion of its asset purchase programme, hinted at by Mark Carney in previous statements.
Our own survey data has shown that over the past six months, business growth has softened across both the manufacturing and services sectors, and low interest rates will continue to support business confidence in these conditions.
Maintaining business confidence and supporting growth should be the primary focus of the MPC, but this must be matched by action from government. The new Chancellor must use the extra headroom provided by the abandonment of the budget surplus target – and historically low interest rates on gilts – to boost growth by delivering the urgently required modernisation of British infrastructure and incentivising business investment.