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| Governor of the Bank of England Mark Carney Photo-AFP/POOL/DYLAN MARTINEZ |
The Bank of England is
mulling whether to cut interest rates for the first time in over seven years to
curb economic fallout from Britain’s vote to exit the EU.
The BoE on Thursday
concludes its first interest-rate meeting since Britain voted on June 23 to
exit the European Union and subsequent comments by governor Mark Carney that
“some monetary policy easing will likely be required over the summer”.
Jonathan Loynes, economist
at Capital Economics research group, said “given that the biggest near-term threat
to the economy is uncertainty and its adverse effects on confidence, an
interest rate cut” could help to re-assure households and markets following the
referendum result.
While markets are pricing in
a cut as early as this week, some analysts believe a drop in the BoE’s main
lending rate from 0.50 percent to a new record-low of 0.25 percent or even zero
may not now occur until August.
This they say is owing to
Theresa May’s quick appointment as prime minister having reduced some of the
political uncertainty that has gripped Britain since the shock referendum
result.
Whether or not a rate cut
occurs Thursday or in August, markets expect that by the end of the British
summer the BoE will unveil a fresh means of stimulating the economy, as the
government heads into tough negotiations on quitting the EU.
Analysts suggest there could
for example be some more cash stimulus pumped around the British economy to
encourage lending by commercial banks.
The central bank’s
quantitative easing (QE) programme, launched alongside record-low interest
rates during the global financial crisis, has enabled an additional £375
billion ($494 billion, 445 billion euros) to move through the economy.
– First steps –
The BoE has already taken
steps to calm fears over Brexit’s economic fallout when it last week relaxed
commercial banks’ capital requirements to boost lending to businesses and
households.
The move — which came as the
bank’s governor Mark Carney warned that risks to financial stability were
materialising following the referendum result — will boost lending by up to
£150 billion and reduce banks’ regulatory capital buffers by £5.7 billion.
Addressing MPs for a regular
update Tuesday, Carney said demand for credit was set to drop because of
uncertainty created by Brexit, adding that the £150 billion lending-boost would
be “part of a series of measures” going forward.
Since Brexit, the BoE has
also vowed to pump at least £250 billion into money markets if needed to
prevent a damaging credit crunch.
Finance minister George
Osborne has meanwhile said that the Treasury could expand the so-called Funding
for Lending scheme, which provides cheap finance to banks in exchange for
increased lending.
“After all the volatility of
the past few weeks, odds have increased sharply that the Bank of England could
well cut interest rates” on Thursday, said Michael Hewson, chief analyst at
trading group CMC Markets.
“It is this expectation that
has helped push the pound to new 31-year lows against the US dollar.”
Hewson added however that
the rate could now remain on hold Thursday as “the political picture has become
much more stable”.
David Cameron on Tuesday
chaired his final cabinet meeting after six years as Britain’s prime minister,
with incoming premier May preparing to form a new government to negotiate
Britain’s exit from the EU.
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