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Mark Carney under increasing pressure to cut interest rates to stem Brexit crisis

The Bank of Enland's interest rate has been at a record low of 0.5 per cent since 2009.

Monday 11 July 2016 09:20 BST

Mark Carney is expected to lower the Bank of England's interest rate from its already historic low on Thursday (Reuters)

Mark Carney’s third week managing Britain’s response to the economic shock of Brexit is about to begin.

With UK politics in disarray after the nation opted to split from the European Union, the Bank of England governor has been leading the charge in offering stability.

After boosting liquidity, freeing banks to lend more and signaling a willingness to loosen monetary policy, Carney will spend the coming days addressing members of parliament and overseeing the central bank’s first interest-rate decision since the Brexit vote.

With gauges of consumer sentiment and business confidence plummeting, the pound near a 31-year low, and signs of strains emerging in property funds, the pressure on the governor could not be higher.

Investors are pricing in about a 74 per cent chance of a rate cut on Thursday, and until then his every word will be scrutinised.

The next few days are “incredibly significant, given all the ructions among politicians generally, and given that the bank has had to step into a policy void and try to steady the ship,” said Chris Hare, an economist at Investec and a former Bank of England official.

“The stakes are really high for Carney and the Monetary Policy Committee, especially given the criticism they got during the Brexit campaign.”

Focus is on Thursday’s monetary-policy announcement, which the nine-member committee will take without substantial data on the economy’s reaction to Brexit.

Still, officials may choose to act pre-emptively to limit the fallout. Thirty of 54 economists surveyed by Bloomberg predict the benchmark interest rate will be lowered on July 14, with a majority of those seeing a 25 basis-point reduction to 0.25 per cent.

“Markets have gone in and priced in a rate cut next week, and from that perspective, if they don’t deliver a cut or something that markets interpret as equivalent to a cut, the risks are that you get bigger moves in rates and foreign exchange,” said James Rossiter, an economist at TD Securities in London and a former Bank of England official, who predicts the bank will lower the benchmark by 25 basis points.

“We just don’t see why they would want to willingly induce that.”

Carney: We have a clear plan

With economists split on whether the Bank will act this week, many predict officials could hold fire until its decision in August, when they have more data and are due to set out new forecasts in the quarterly Inflation Report.

“I expect the statement to say something along the lines of, ‘we will monitor and take a more considered view in August,’” said Hetal Mehta, a London-based economist at Legal & General Investment Management.

“That’s when we’ll see a package and a press conference to discuss these things in more detail.”

Treasury Committee

Carney’s performance so far is already set for scrutiny. He’ll testify at the Treasury Select Committee at 10 am on Tuesday in London alongside the bank’s Deputy Governor Jon Cunliffe and officials Donald Kohn and Richard Sharp and may be asked to explain the Financial Stability Committee’s decision to lower the countercyclical-capital buffer for UK banks.

The hearing will also give pro-Brexit MPs including Conservative Jacob Rees-Mogg the opportunity to face the governor after several heated exchanges in the run-up to the referendum, when Rees-Mogg said Carney’s comments on the potential economic impact of Brexit were “beneath the dignity of the Bank of England” and that he should be fired.

6 ways Britain leaving the EU will affect you

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1/66 ways Britain leaving the EU will affect you

6 ways Britain leaving the EU will affect you

More expensive foreign holidays

The first practical effect of a vote to Leave is that the pound will be worth less abroad, meaning foreign holidays will cost us more

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6 ways Britain leaving the EU will affect you

No immediate change in immigration status

The Prime Minister will have to address other immediate concerns. He is likely to reassure nationals of other EU countries living in the UK that their status is unchanged. That is what the Leave campaign has said, so, even after the Brexit negotiations are complete, those who are already in the UK would be allowed to stay

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6 ways Britain leaving the EU will affect you

Higher inflation

A lower pound means that imports would become more expensive. This is likely to mean the return of inflation – a phenomenon with which many of us are unfamiliar because prices have been stable for so long, rising at no more than about 2 per cent a year. The effect may probably not be particularly noticeable in the first few months. At first price rises would be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum

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6 ways Britain leaving the EU will affect you

Interest rates might rise

The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates. This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output

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6 ways Britain leaving the EU will affect you

Did somebody say recession?

Mr Carney, the Treasury and a range of international economists have warned about this. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. But there is no doubt that the Leave vote is a negative shock to the economy. This is because it changes expectations about the economy’s future performance. Even though Britain is not actually be leaving the EU for at least two years, companies and investors will start to move money out of Britain, or to scale back plans for expansion, because they are less confident about what would happen after 2018

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6 ways Britain leaving the EU will affect you

And we wouldn’t even get our money back

All this will be happening while the Prime Minister, whoever he or she is, is negotiating the terms of our future access to the EU single market. In the meantime, our trade with the EU would be unaffected, except that companies elsewhere in the EU may be less interested in buying from us or selling to us, expecting tariff barriers to go up in two years’ time. Whoever the Chancellor is, he or she may feel the need to bring in a new Budget

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Other politicians who criticised the governor during the Brexit campaign have since praised the bank’s pro-activeness. Andrea Leadsom, who is competing with Theresa May to succeed David Cameron as prime minister and spoke against Carney during the campaign, said last week that he has done a “great job” reassuring financial markets.

With the ruling Conservative Party only choosing Cameron’s replacement in September, the timing of Britain’s divorce from its biggest trading partner — and what access to the single market the U.K. might retain — remains elusive.

“While it’s helpful to know that we’re down to two PM candidates, they’re still just candidates,” TD Securities’ Rossiter said. “It certainly leaves Carney as the most important person to watch for the next 10 weeks or so.”

© 2016 Bloomberg

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