Pound falls as Bank of England hints at fresh stimulus measures

The Governor's remarks have been taken as a sign that interest rates will be slashed ths summer as a result of the Brexit result

Rachael Pells
Thursday 30 June 2016 20:30 BST
(Matt Dunham / PA)

The pound has fallen by more than 1 per cent following hints from Bank of England Governor Mark Carney at fresh economic stimulus measures this summer.

In a speech given at Threadneedle Street, the Governor warned that the referendum result had increased uncertainty about the outlook for the UK economy, given the “major regime shift” that leaving the EU entails.

A deteriorating pound means “some monetary policy easing will likely be required” he said, indicating that the Bank is likely to take action by way of slashing interest rates this summer.

The pound fell by as much as 1.6 per cent on Mr Carney’s remarks, knocking sterling to a low of $1.3211.

The Bank's key interest rate - currently at a record low of 0.5 per cent - is its chief tool of monetary policy.

A cut in interest rates would have a knock-on effect on savings rates, making the pound a less attractive currency to hold and do business in.

Speaking to business leaders for the second time since the Brexit result, Mr Carney said: “In my view, and I am not pre-judging the views of the other independent Monetary Policy Committee (MPC) members, the economic outlook has deteriorated”.

Responding to questions from the media, Mr Carney said the MPC would make an assessment as to whether a policy response was required, and what that response might be.

The Bank has predicted that growth will be slower than previously expected next year.

Until now, a fall from 2.3 per cent to 1.6 per cent has been predicted, a figure that was based on the expectation that Britain would vote to remain in the EU.

”It now seems plausible that uncertainty could remain elevated for some time, with a more persistent drag on activity than we had previously projected,“ he said.

Any cut in interest rates would mean cheaper borrowing for UK householders, but a further period of low returns for savers.

Mr Carney accepted there were risks to taking such action, however, as well as the effects on businesses and individuals.

”As we have seen elsewhere, if interest rates are too low - or negative - the hit to bank profitability could perversely reduce credit availability or even increase its overall price,“ he said.

He gave an assurance that the Bank would take ”whatever action is needed“ to support growth, but also said that it was an ”uncomfortable truth“ that the Bank could not in itself affect the direction of the economy.

”Monetary policy cannot immediately or fully offset the economic implications of a large, negative shock,“ he said.

”The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policy makers.

“This will be driven by much bigger decisions; by bigger plans that are being formulated by others.”

The pound set a 31-year low of $1.3118 on Monday, and analysts expect it is only a matter of time before it finds a lower level.

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