Bank of England set to cut interest rates
The Bank of England is poised to slash interest rates to close to zero this week as fears mount over a Brexit-induced recession.
Economists believe the Monetary Policy Committee (MPC) will cut rates to a new low of just 0.25 per cent on Thursday, while markets have priced in a 75pc chance of more easing.
Mark Carney, governor of the Bank of England, looks set to deliver the first interest rate cut since 2009. Photo: Bloomberg
Bank of America Merrill Lynch believes policymakers will reduce rates to as low as 0.1 per cent.
A cut would be the first change in interest rates since March 2009, when the base rate was slashed to 0.5 per cent.
Global investors have rowed back their hopes for higher interest rates following the UK’s decision to leave the EU. Ahead of last month’s poll, markets were priced for 0.19 percentage points of rate cuts from the G7 central banks over the coming year. Now, they expect almost a full percentage point of cuts to be unleashed in the next 12 months.
Money managers believe that the Bank of England’s cuts will be the deepest, slashing rates from their historic low to just above 0.1 per cent. The next interest rate rise in Britain is not expected until 2022.
While some economists expect policymakers to wait until August to slash rates, others urged swift action. “If the MPC has already decided monetary easing will be needed, there is little point waiting,” said HSBC analysts.
Former Bank insiders agreed. “Policymakers already know there’s a car crash ahead. It’s better to put the brakes on now than wait until you’re about to hit the wreckage,” said one.
The Bank of Japan and Bank of Canada are also expected to unleash stimuli in the next year, while the US Federal Reserve’s plans for further rate rises have been all but abandoned, despite last week’s robust jobs figures.
The nine MPC members are also expected to signal a fresh round of quantitative easing to support growth.
Analysts believe the Bank will start adding to its £375 billion stockpile of asset purchases next month, when policymakers will publish an analysis of the likely impact of the Brexit vote on growth and inflation.
Mark Carney, the Governor of the Bank, has said he expects some monetary easing will be required. However, he warned of the potential consequences of ultra-low rates.
“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.
Two founder MPC members urged policymakers to proceed carefully. Prof Charles Goodhart said: “I probably would have waited to see how things were panning out, but [Carney] has [signalled a rate cut], and therefore not to go through with it by August would lead to further uncertainty.”
Dame DeAnne Julius said she believed the Bank’s decision to relax capital buffer requirement for banks, which freed up £150 billion to be lent to the economy, was sufficient for now.
“We’ve already got additional stimulus from that, which could be undermined if the MPC cuts rates because that will hurt banks. So they’d be giving with one hand and taking away with the other,” she said.
Dame DeAnne also said the UK could still flourish if it traded under World Trade Organisation rules. While she said gaining access to the single market “should be the objective”, she added: “I don’t feel the WTO option is a bad alternative. Trade is something business does, it’s not something that politicians make happen.”