Bank of England poised to cut interest rates to new record low

Almost all economists now expect the BoE to cut rates by at least a quarter of a percentage point on

David Milliken
Thursday 04 August 2016 09:22
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Bank of England governor, Mark Carney is expected to cut the benchmark rate to 0.25%
Bank of England governor, Mark Carney is expected to cut the benchmark rate to 0.25%

The Bank of England is poised to cut interest rates for the first time since 2009 later on Thursday, as Britain's economy teeters on the brink of recession after June's vote to leave the European Union.

Although the Bank wrong-footed financial experts three weeks ago by leaving rates unchanged, the central bank said most of its policymakers were likely to support action in August as post-referendum uncertainty depressed the economy.

Since then growth appears to have slowed sharply, and a closely watched industry survey on Wednesday suggested Britain's economy was shrinking at the fastest pace since the last time the Bank lowered rates.

Almost all economists now expect the BoE to cut rates by at least a quarter of a percentage point on Thursday to a record-low 0.25 per cent, and many also think it may resume its multi-billion-pound programme of government bond purchases.

“There is enough evidence on the negative shock to the economy that some easing is justified,” Investec economist Philip Shaw said, though he viewed the scale of the slowdown as too unclear for the Bank to buy bonds on top of a rate cut.

The BoE's chief economist, Andy Haldane, has said he is willing to respond to weak growth by using “a sledgehammer to crack a nut”, but another, Kristin Forbes, said last month she had not seen enough evidence to support a rate cut.

While most business and consumer surveys point to a marked slowdown, it is too early for any cast-iron official data on how output has been affected by June 23's Brexit vote.

If the Bank does cut its Bank Rate to the lowest level in its 322-year history, it will join the Bank of Japan and the Reserve Bank of Australia, which both undertook unprecedented stimulus in the past week.

Only the US Federal Reserve among the world's main central banks is considering tighter policy this year.

Rate cuts effective

However, economists, including former top BoE officials, have doubts about how much good either rate cuts or more quantitative easing will do with both official interest rates and government borrowing costs already at or near record lows.

Charles Bean, who stepped down as the BoE's deputy governor in 2014, said the Bank still had options, such as expanding the array of assets it buys beyond government bonds to include corporate debt or even equities. But that could put public money at risk and be politically difficult.

“If you go into buying equities, as the Bank of Japan has dabbled with ... that is taking the Bank into quite political territory. If there was a decision to go that way it should be in conjunction with the Treasury,” Bean said on Tuesday.

Many economists also expect the Bank to revitalise its waning Funding for Lending Scheme or take other measures to tempt banks to lend at record-low rates.

The Bank will announce its policy decision at 1200 London time, and Governor Mark Carney will hold a news conference at 1230 London time.

The Bank will also publish the first exchange of letters between Carney and new Chancellor Philip Hammond, who last month replaced George Osborne - the man who plucked Carney from the Bank of Canada more than three years ago.

Carney must write to Hammond because annual inflation was just 0.5 per cent in June, far below its 2 per cent target.

This is unlikely to be a problem for long. Sterling's 12 per cent slide against the dollar since the EU vote looks set to send inflation soaring above target.

But there will be a focus on any hint of extra government spending to support the economy, after Hammond said he may use a half-year budget statement in the autumn to reset fiscal policy.

Click here to download your free guide on Brexit ideas and action plans, from Independent Partner, Hargreaves Lansdown

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