The Bank of England will consider the first interest rate cut for more than seven years this week, as it seeks to contain the economic fallout from the Brexit vote.
Some City economists predict that with consumer confidence battered and businesses nervous about spending and hiring, the Bank will want to shore up sentiment by reducing interest rates further from a record low of 0.5%.
The Bank’s governor Mark Carney has dropped heavy hints of a summer rate cut but he and fellow rate setters may want to see more evidence of the Brexit vote’s impact before acting. The nine-member monetary policy committee will announce its decision on Thursday at midday and experts say it has a range of options - including doing nothing for now.
Forecasts for what policymakers will vote to do in the wake of the referendum vary from keeping rates on hold to slashing them by 50 basis points to zero. Some say the committee will go for a smaller 25 basis point cut, leaving itself the option to cut again in August when it also publishes new economic forecasts and will have a better sense of how the EU referendum result has affected the UK.
Carney laid the groundwork for a rate cut in a carefully orchestrated market intervention a week after the Brexit vote wrongfooted investors. Speaking as the pound was plumbing 31-year lows and shares in banks and housebuilders tumbled, Carney said his personal view was that “some monetary policy easing will likely be required over the summer”.
That marked a complete turnaround from the pre-referendum pattern of Bank policymakers seeking to guide markets on when rates might rise again, after more than seven years at 0.5%. Official borrowing costs were last cut in March 2009 when the UK was in recession and they have been on hold ever since.
Philip Shaw, an economist at City bank Investec, said: “This state of policy inaction is about to change. The question ... has become not if the MPC will ease but what, how much and when.”
- The Bank has also taken steps to release up to £150bn worth of lending to households and businesses by relaxing regulatory requirements on the banking sector. But with interest rates already at record lows and following a money-printing exercise, known as quantitative easing, questions remain over how much ammunition the Bank has left to help the economy.
- Economists at investment bank JP Morgan said: “A difficult issue lies in the background. Can an independent central bank like the BoE/MPC state publicly that it does not believe it has the tools to deliver on its mandate?”
A poll of economists by Reuters last week suggested the Bank would choose to wait until August to cut interest rates or use other monetary policy tools such as quantitative easing, where the Bank pumps money into the financial system by acquiring bonds from financial institutions in the hope that they will put the proceeds back into the UK economy.
Nearly two-thirds of 52 economists polled said interest rates would be held steady on Thursday. Seventeen predicted a cut to 0.25% and another two said rates would be slashed to zero.
In his speech debating imminent rate cuts, Carney said that the economy was already showing signs of strain. He also highlighted the legacy of previous shocks that meant businesses and households were suffering from “economic post-traumatic stress disorder”.
Business and consumer surveys suggest that confidence has dropped in the wake of the referendum.
A closely watched consumer confidence index from market researchers GfK last week recorded the biggest drop in sentiment for 21 years, following the Brexit vote.
This article was written by Katie Allen, for theguardian.com on Sunday 10th July 2016 12.42 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010