Britain’s vote in June to leave the European Union, along with recent economic data which underscored the ensuing setback to consumer confidence and business activity, have boosted speculation that the BOE will loosen monetary policy on August 4.
Advertisement
A Reuters poll of economists published on July 26 predicted the British central bank would cut its benchmark Bank Rate to 0.25 percent from 0.50 percent on August 4, but most said it would not revive its massive bond-buying program for now. The Bank will also hope to boost business sentiment and companies’ willingness to keep investing amid the uncertain outlook. In contrast, Reuters reported that the bank may adopt more conservative measures such as the encouragement of bank lending while it determines the extent of Brexit’s effect on the British economy.
The BoE will publish its decision at noon in London on Thursday, alongside MPC members’ votes and new economic forecasts. As such, it may go further than rate cuts and announce a programme of money printing or lending schemes. The policymaker Martin Weale, who has previously opposed the rest of the committee and voted for rate rises, suggested that he was likely to use this week’s meeting to support some form of stimulus for the economy.
Ben Brettell, senior economist at Hargreaves Lansdown, wrote shortly after the initial announcement of interest rate cuts: “The referendum result has kicked the prospect of higher returns on cash into the seriously long grass”.
Less than half of the economists surveyed by Reuters expect the quantitative easing bond-buying programme to be restarted. It is a stark contrast to expectations before the vote to leave the European Union, when the next move in interest rates was seen as likely to be upwards.
Barclays’ chief Jes Staley said that harming banks means a rate cut may not be worth it.
Allan Monks, an economist at JP Morgan. said: “The Bank of England seems all but certain to ease policy, with only the scale and form of easing in question”.
With such odds priced in, there is a risk policy measures fall short of what markets are predicting. A rate reduction would be the first change in seven years, when officials were in the midst of battling the recession.
Meanwhile, a BBC report cautioned that Bank of England Interest rate cut will escalate income inequalities.
In the past, the QE programme has been criticised for not providing enough help to the real economy.
But the Citi economists also said they expected only a slow shift toward more active government support for growth by cutting taxes or higher spending, possibly funded by newly created money from central banks which would not be repaid, a concept known as helicopter money.
That was the first increase in almost a decade and in the seven years since base borrowing costs were dramatically cut to boost the economy after the financial crisis. Rates below zero would be a big surprise, as Carney has signaled negative rates are off the table, in part due to concerns about the impact on bank profitability.
There have been more than 900 cuts to savings rates since the start of the year, with only about 100 increases.
Advertisement
“The crucial factor weighing on the United Kingdom growth outlook is the uncertainty relating to the Brexit negotiations and new trade deal with the European Union”.
