Bank of England Rate Cut in Focus as Brexit Rattles Economy

BOE Offers Carney Time to Reflect on Post-Brexit Data
  • Carney said easing will probably be needed over the summer
  • Traders are pricing in about an 80% chance of a rate reduction

It’s the most hotly anticipated Bank of England decision for years. 

After the shock of Britain’s Brexit vote rattled the economy and Governor Mark Carney said easing will probably be needed this summer, investors are betting the central bank will cut interest rates for the first time since 2009.

The nine-member Monetary Policy Committee announces its decision at noon in London. Carney will also meet the newly-appointed Chancellor of the Exchequer Philip Hammond Thursday. Thirty-one of 54 economists asked by Bloomberg predict a reduction in the benchmark rate, with the majority of those seeing a cut to a record-low 0.25 percent. Still, a lack of data on the outlook means 23 of those surveyed see no change this month.

Those predicting quick action point to signs that growth was already slowing before Britain opted to quit the European Union. The National Institute of Economic and Social Research said its estimate for June gross domestic product shows “intensifying contraction across the board.”

Reports suggest a further deterioration is on the way. With no plan on the U.K.’s exit strategy forthcoming and political turmoil only just starting to ease, uncertainty is high. A Lloyds Banking Group Plc gauge showed business sentiment sank to a 4 1/2-year low in the days after the referendum, while GfK’s core index consumer confidence plunged the most in 21 years.

A rate cut isn’t policy makers’ only option. The MPC could also choose to restart asset purchases or use other unconventional measures to kick start growth. And they could wait to see if the pound’s slide has a stimulative effect.

Sterling has weakened almost 11 percent versus the dollar since the referendum, touching a more than three-decade low. That pushes up costs for importers and stokes inflationary pressure, potentially pushing the rate of price growth above the BOE’s 2 percent target. The U.K.’s borrowing costs have also dropped, with five-, 10- and 30-year gilt yields plumbing record lows.

For policy makers who may prefer to see how the outlook evolves, there are signs that the worst is over for stocks. While U.K. banks are about 8 percent lower since the vote, they’ve recouped almost half their losses. The FTSE 100 Index, which includes megacaps that generate most of their sales overseas, has rebounded to the highest in almost a year.

With just three weeks until their next policy decision on Aug. 4 and limited data available, policy makers face a tough call. Yet while economists are split over whether they’ll go for a cut on Thursday, markets seem more sure. Traders are pricing in an 81 percent chance of a rate cut, up from 11 percent before the referendum.

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