Denis Staunton, London Editor

Sterling leapt on foreign exchange markets after the Bank of England left interest rates unchanged at 0.5 per cent, despite widespread expectations of a rate cut to soften the economic impact of Britain's decision to leave the European Union. The British currency later eased back from itw two-week high on the belief that a cut would happen soon.

Sterling soared to as high as $1.3480 after the raate announcement, up more than 2 percent on the day and its strongest since June 30. It later pared those gains to trade at $1.3335, up 1.4 percent. Nevertheless, traders said the bounce is unlikely to last long given the expectations of easier monetary policy.

The bank’s monetary policy committee voted by a majority of eight to one against a cut to 0.25 per cent, although it acknowledged signs of a weakening in the economy since the referendum.

The committee suggested that the decision on cutting interest rates had been deferred rather than rejected, signalling a likely easing in August.

“In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the committee expect monetary policy to be loosened in August,” it said.

“The precise size and nature of any stimulatory measures will be determined during the August forecast and inflation report round.”

Sentiment

Official data on economic activity since the referendum are not yet available but the committee said there were already signs that the result has affected sentiment among households and companies.

“Early indications from surveys and from contacts of the Bank’s Agents suggest that some businesses are beginning to delay investment projects and postpone recruitment decisions.

Regarding the housing market, survey data point to a significant weakening in expected activity. Taken together, these indicators suggest economic activity is likely to weaken in the near term,” it said.

Earlier, incoming chancellor of the exchequer Philip Hammond signalled a change in economic policy, abandoning George Osborne's deficit reduction target and ruling out a new austerity budget. Before the referendum, Mr Osborne had warned that, if Britain voted for Brexit, a harsh emergency budget would be needed to plug a likely hole in public finances.

“Our economy will change as we go forward in the future and it will require a different set of parameters to measure success. Of course we have got to reduce the deficit further but looking at how and when and at what pace we do that and how we measure our progress in doing that is something that we now need to consider in light of the new circumstances that the economy is facing,” Mr Hammond told the BBC.

The chancellor also appeared to rule out a post-Brexit deal which would keep Britain inside the European single market after it leaves the EU. He said that Britain would leave the single market but hoped it would later have access to it.

Partners

“We will come out of the single market as a result of our decision to leave the European Union. The question is how we negotiate with the European Union, not from the point of view of being members but from the point of view of being close neighbours and trade partners,” he said.

Sterling plunged more than 13 per cent against the dollar in the days after the vote and trillions of dollars were wiped off stock markets globally.

However, the quicker-than-expected appointment on Wednesday of Theresa May as Britain's new prime minister has helped settle nerves in financial markets.

Mr Carney sent a clear signal two weeks ago that stimulus was on the way over the summer in an attempt to show the economy was in safe hands as the country’s political leadership crumbled after the EU vote.

But Mr Carney has also suggested he does not favour a sharp cut in borrowing costs because of the possible impact on banks based in Britain, and he has said he did not want to follow the example of the European Central Bank and the Bank of Japan by cutting rates below zero.

“The bigger surprise is...that the Bank of England was ready to disappoint market expectations so soon after the Brexit vote,” said Michael Metcalfe, head of Global Macro Strategy, State Street Global Markets. “While a rate cut can still come at the next meeting, the delay hints at concern about the inflationary impact of sterling weakness and some uncertainty as to how rapidly the economy will actually slow.”

Data released early on Thursday showed interest among buyers in Britain’s housing market tumbled to its lowest level since mid-2008,adding to early signs of the Brexit hit to the economy.

The BoE said it expected “sizeable falls” in commercial real estate prices in the near term.

Last week, Mr Carney warned last week that the financial risks of Brexit were materialising after valuations in the commercial property sector fell sharply prompting some investment funds froze their funds.

– Additional reporting by Reuters