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Bank of England holds its fire but signals August rate cut

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Bank of England holds its fire but signals August rate cut

TheBank of England leftits key interest rateunchanged in its first monetary policy meeting since the U.K. voted to leavethe EU, wrong-footing analysts and sending the pound soaring, but said it waslikely to ease in August after forming a more accurate idea of Brexit's effecton inflation expectations.

Analysts,who had broadly expected a 25-basis-point cut from an already historic low 0.5%,said they had pushed back their forecast to the next meeting in three weeks'time after the BoE said the shock result of the June 23 referendum had put theeconomy on a significantly lower path for growth and a higher path forinflation than previously forecast.

Althougha 6% fall in the pound sterling's effective exchange rate since the monetarypolicy committee's mid-June meeting has pushed up short-term inflationexpectations, the annual rate of price increases was just 0.3% in May, andlonger-term measures of expectations project a slight decline, the committeesaid. It added that it wanted to see the results of the inflation report dueAug. 4 before deciding on the size and composition of additional stimulus.

"Fromthe tone of the MPC minutes they are mindful that investment could fall, hiringcould stall and the economy could slow quite sharply, said Nick Stamenkovic, afixed-income strategist at broker RIA Capital Markets. "But they want tohave evidence of that before they're prepared to pull the trigger."

Thebank was likely to cut by 25 basis points, he said, though any reactivation ofits quantitative easing program was likely to wait until it had reduced itspolicy rate to zero. The BoE holds £375 billion of governmentbonds, first bought from 2009 to 2012.

SociétéGénérale economist Michel Martinez agreed on the rate cut, adding in aninterview that he had no clear view on when QE would restart. Before themeeting, SocGen had projected £25 billion of additional bond purchases perquarter, in addition to a 25-point base rate cut.

ABNAMRO, meanwhile, forecast that the BoE would launch a new purchase program totake its bond holdings to £525 billion between September 2016 and June 2017.Borrowing conditions for banks could also be eased in its Funding for Lendingprogram.

Thepound was 1.3% higher at $1.33 at 3:35 p.m. London time, having jumped fromclose to $1.32 before the bank's minutes were released at midday.

Sharesin domestically focused U.K. banks rose, with Lloyds Banking Group Plc gaining 1.9% and 2.9%. But trading volumes were low and bank shares also got a boost frombetter-than-expected second-quarter earnings by , SanfordBernstein analyst Chirantan Barua said in an interview.

Althoughlower interest rates will compress banks' already tight , BoE action tosupport the economy will help lending and contain increases in bad loans.

Thebank's committee voted by a majority of 8-1 against a rate change, with memberGertjan Vlieghe voting for a cut to 0.25%, it said, adding: "Most membersof the Committee expect monetary policy to be loosened in August."

Businessesappear to be beginning to delay investment projects and postpone recruitmentdecisions after the referendum, the BoE said, adding that a significant weakeningin housing market activity and in the economy as a whole was likely in the nearterm.

GovernorMark Carney said June 30 that the bank would likely ease interest rates overthe summer and perhaps implement other policies to mitigate the fallout fromthe referendum, which economists fear will sap business investment asuncertainty hangs over the U.K.'s trading relations with the EU.