The Bank of England is expected to cut interest rates for the first time since the financial crisis this week and lower its United Kingdom growth forecasts by the biggest margin on record, in response to the uncertainty caused by the European Union referendum result. The central bank will release its rate decision, minutes and quarterly inflation report on Thursday, in what has been dubbed “Super Thursday”. Some of these effects are beginning to manifest in surveys of investment intentions, business activity, and the housing market.
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Nearly all economists expect the BoE to reduce rates by at least a quarter percentage point to 0.25 per cent today, but they are more split as to whether it will restart its quantitative easing programme of government bond purchases. It is hoped that cutting rates could push up activity in the housing market by lowering mortgage costs.
That is despite a raft of data suggesting that confidence in the economy has fallen sharply after the Brexit vote, and that Britain may be heading for a recession.
The nine-strong MPC will make their decision after business and consumer surveys conducted after the vote to leave the European Union signalled a drop in activity and confidence.
The last time the Bank cut interest rates was in March 2009, at the height of the financial crisis. “Looser monetary policy should be supportive for the United Kingdom and European stock markets”, said Hantec Markets analyst Richard Perry. Instead, it was slightly worse, another hint of an economic backlash from June’s Brexit vote. July’s PMI figures showed that both the manufacturing and service experienced a drop in orders and output.
However, contrary to investor expectations, the BOE abstained from taking any policy action in July and chose to keep a watching brief and wait until the effects of Brexit on Britain’s economy became apparent. The big question then, is which kind of measures the bank will roll out.
Mr. Turner, like most analysts, believes the MPC will vote for a 25-basis-point rate cut (from 0.5% to 0.25%). Amid the heightened uncertainty, expectations are riding high that it will announce a raft of measures to support the economy – including a possible Base Rate cut. 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.
Interest rates since 2009 Interest rates since 2009.
The bank introduced a Term Funding Scheme that will be financed by the issuance of central bank reserves.
There is also speculation the central bank will restart its quantitative easing program and buy between £25 billion ($33 billion) and £50 billion in assets, adding to the £375 billion it has already purchased.
The Bank’s latest forecasts are expected to reveal an unprecedented downgrade of the prospects for Britain’s economy. The yen fell 0.1 percent to 101.33 per dollar and the euro pulled back a similar amount to $1.1138.
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A report from payrolls processor ADP on Wednesday showed US private employers added 179,000 jobs in July, a tad above market expectations and bolstering hopes that Friday’s non-farm payrolls data could show moderate growth in employment. The Bank is in danger of running out of ammunition in the battle against an economic showdown. But if it strikes a more upbeat tone, it opens itself up to charges it had engaged in scaremongering ahead of the Brexit vote. A press conference held by Bank of England Governor Mark Carney is scheduled to follow the decision at 7:30 a.m. ET.
