'Super Thursday' sees Bank of England hold firm on August interest rates

The Bank of England held the UK's benchmark interest rate at 0.25% at the conclusion of its latest Monetary Policy Committee (MPC) meeting on Thursday (3 August).

The benchmark rate had been stable at 0.5% from March 2009 to August 2016, when the MPC decided to reduce it by 25 basis points that month, in the wake of dire survey data following the Brexit vote.

The holding pattern was supplemented yet again by a decision to maintain the central bank's asset purchase programme at £435bn, which was in line with market expectations.

The Treasury-backed Term Funding Scheme – instituted in August 2016 to reinforce the pass-through of the cut in interest rate and the purchase of UK corporate bonds – was also maintained. It will continue to run until February 2018, and has already seen £78bn be lent to UK banks at close to the current base rate of 0.25%.

Minutes of the rate-setting Monetary Policy Committee (MPC) indicated that members voted 6-2 to keep interest rates on hold at 0.25%, making it a year at that level, and over 10 years since a rate hike back in July 2007.

Marking what the market dubs a 'Super Thursday', the central bank's quarterly inflation report, published in tandem with the interest rate decision and minutes of MPC meeting, cut the UK's growth forecast for this year from 1.9% to 1.7%, while forecast for growth in 2018 was downgraded from 1.7% to 1.6%.

The central bank said it expects UK inflation as measured by the consumer price index (CPI) to peak at 3% in October this year. It is then forecast to fall to 2.58% in 2018, before peaking at 2.19% and 2.22% in 2019 and 2020 respectively, marginally above the Bank's 2% target.

Commenting on the forecasts, Governor Mark Carney said: "The MPC's projections continue to be conditioned on a smooth transition to an average of possible outcomes for the UK's post Brexit trading relationships.

"In the MPC forecast, uncertainty about the eventual shape of the UK's economic relationship with the EU weighs on the decisions of businesses and households and pulls down both demand and supply."

In response, the pound, which was riding high in recent sessions, retreated sharply as traders soaked in comments from the BoE.

At 12:53pm BST, the British currency was exchanging at $1.3151; down 0.54% against the greenback. The pound also retreated 0.44% versus the euro, changing hands at €1.1106.

"The central bank's forecast is that the UK will exit the EU smoothly, despite some indications that the Government's position is currently not clear," said Shilen Shah, bond strategist at Investec Wealth & Investment.

"Given the relatively tight labour market and weak productivity growth, the central bank continues to assume that the output gap will be closed within three years even though Brexit continues to be the elephant in the room."