BOE to Cut Again as Economists, OECD Paint Gloomy 2017 Picture

Will Brexit Make the BOE Think Again?
  • Survey sees 2017 growth of 0.7%, worst since last recession
  • OECD sees downside risks, BOE report notes weaker investment

The Bank of England will cut interest rates close to zero later this year as concern persists about the longer-term impact of the Brexit vote, according to a survey.

Forecasts in the latest Bloomberg monthly poll show that recent signs of strength haven’t dissuaded economists from the view that there will be a sharp cooling in growth in 2017. They see the pace slipping to just 0.7 percent from 1.7 percent this year. That would be the worst performance since 2009, when the economy was last in recession.

The survey came as the Organization for Economic Cooperation and Development published its latest global projections, which included a huge 2017 downgrade for the U.K. It sees growth of 1 percent, just half the pace projected in early June, before the referendum to leave the European Union.

Chancellor of the Exchequer Philip Hammond responded to the OECD report by saying there will be “some difficult times ahead,” but that the government has the tools to support the economy.

As Hammond prepares for his end-of-year fiscal statement in November, the latest data on the public finances showed the budget shortfall is declining more slowly than the government forecast. He’s indicated he’ll relax the squeeze planned by his predecessor, George Osborne, though it’s not clear how much he’ll allow the deficit to deteriorate.

Fiscal Pledge

“The chancellor has made clear that monetary policy is the first line of defense,” said Jamie Murray, an economist at Bloomberg Intelligence in London. “But perhaps more importantly, it’s unlikely that the new prime minister and chancellor will want to be seen completely abandoning their party’s long-standing commitment to deficit reduction at the first opportunity.”

The BOE, which cut its key rate to 0.25 percent in August, has kept alive the idea that it could loosen again before the end of the year. It sees the lower bound as close to, but just above, zero. While most of the survey respondents see another cut, they are divided as to whether the central bank will move again in November, when it has new internal forecasts, or in December, when it will have had a chance to digest the government’s fiscal plans.

The BOE said Wednesday that the pace of U.K. activity growth had slowed since the EU referendum, though it remained positive. Citing a monthly report from its agents, it said consumer confidence and spending had been more resilient in recent months, but businesses’s investment and employment intentions fell.

Governor Mark Carney has stood by his actions since loosening policy in August, despite better-than-expected economic numbers. Still, near-term resilience doesn’t mean the U.K. is out of the woods, with Bank of America-Merrill Lynch saying this month that the economy will experience a “less acute but more chronic shock.” 

The central bank said last week that while an expected slowdown in the second half of 2016 might be less severe than initially anticipated, it was “difficult to draw any strong inferences” about 2017 and beyond. The Office for National Statistics provided a similar assessment in a report on Wednesday, saying the full picture is still emerging.

“As the available information grows, the referendum result appears, so far, not to have had a major effect on the U.K. economy,” said ONS Chief Economist Joe Grice. “So it hasn’t fallen at the first fence but longer-term effects remain to be seen.”

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