Photographer: Simon Dawson/Bloomberg

U.K. Slowdown Will See BOE Cut Rate to Near Zero, Niesr Says

  • Forecasts 25-basis-point rate cut, QE expansion on Thursday
  • Institute sees U.K. economic growth slowing to 1% in 2017

The Bank of England will probably cut interest rates close to zero to ward off a recession triggered by the country’s decision to quit the European Union, according to the National Institute for Economic and Social Research.

In a report published in London on Wednesday, Niesr predicted the Brexit vote means there will be a “marked” slowdown as uncertainty and a tightening of financial and credit conditions damp business investment and consumer spending. 

Growth will probably slow to 1.7 percent in 2016 and 1 percent in 2017, according to the institute, an outlook that will prompt the BOE’s Monetary Policy Committee to lower its key rate to 0.1 percent, with cuts in August and November. The rate has been at 0.5 percent since March 2009.

“The downturn is here and now, which is why we expect the MPC to be responding,” Simon Kirby, an economist at Niesr, told reporters in London. While the organization’s forecasts are more upbeat than those in a Bloomberg survey of economists, “there are serious risks to the near-term,” he said, adding that it wouldn’t be surprising if the economy weakened more than he currently anticipates.

The report adds to evidence that Britain’s June referendum, in which the country decided to divorce from its biggest trading partner, is having an adverse impact on the economy. While Niesr predicted inflation will accelerate to just over 3 percent at the end of 2017 -- well above the BOE’s 2 percent target -- it said officials are likely to look through that and focus on boosting output.

Fifty of 52 economists surveyed by Bloomberg predict the BOE will lower its key rate on Thursday, with the majority seeing a cut to 0.25 percent. Niesr forecasts unemployment will rise to 5.8 percent and said there is an “even” chance of a technical recession in the next eighteen months.

Speaking to reporters, Niesr economist Jack Meaning questioned the effectiveness of any monetary-policy measures at a time when interest rates are already at a record low.

“If they were to go to the limits of those policy tools, they would almost, but not quite, offset the downturn,” Meaning said. “If there were to be a fiscal policy response, that would change the picture slightly,” and make the slowdown less protracted and less severe, he said.

Former BOE policy makers Charlie Bean, Kate Barker and Charles Goodhart said this week that central-bank stimulus can only do so much and that the onus is on the new Chancellor of the Exchequer Philip Hammond. While Hammond has indicated there’s scope for fiscal expansion, he ruled out concrete measures until later this year.

Some BOE officials have been more vocal, with Chief Economist Andy Haldane saying he favors taking a “sledgehammer” approach to fend off a Brexit-induced downturn. Minutes from the central bank’s meeting last month indicated most officials will vote for stimulus this month.

The BOE “should be looking to push to those limits in the absence of a fiscal policy response,” Meaning said. “Monetary policy makers should be looking for as much as a sledgehammer as they can get.”

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