LONDON – Britain’s vote to leave the European Union is already taking its toll on the British economy, raising speculation that the Bank of England will on Thursday decide to reduce its main interest rate to a record low.
With consumer and business confidence already showing signs of softening since the June 23 referendum and many forecasters predicting a slide into recession, economists think it’s inevitable that the Bank’s rate-setting monetary policy committee will choose to stimulate the economy, perhaps as soon as Thursday’s meeting.
Bank Governor Mark Carney has already indicated that some sort of stimulus will be offered during the summer months as his pre-vote warnings about the impact on the economy had begun to crystallize.
A plunge in consumer confidence as measured by market research firm GfK and evidence of markedly reduced business sentiment make the case for action sooner rather than later.
One course would involve a reduction in the bank’s benchmark rate from the current record low of 0.5 per cent, where it has stood since the depths of the financial crisis in March 2009 — the hope being that a reduction will boost lending and shore up household spending, helping to offset at least part of the Brexit shock.
Another option is to re-start the so-called quantitative easing program under which the bank effectively pumps money into the economy via the purchase of government bonds from financial institutions.
“With the U.K. economic outlook weakened by the Brexit vote, there can be very little doubt — if any — that the Bank of England will enact some stimulus on Thursday,” said Howard Archer, chief U.K. economist at IHS in London. “The only question really seems to be exactly what action will the (monetary policy committee) take?”
Not all economists expect a rate cut on Thursday, however.
Some think the committee could wait until its next meeting in three weeks before cutting the rate to 0.25 per cent. At August’s meeting, the panel will be armed with fresh economic forecasts that will provide further clarity about the impact of the Brexit vote.
Carney said in a June 30 speech that the monetary policy committee will make an initial assessment of the economic situation at this week’s meeting and release new economic forecasts in August, indicating the two meetings should be seen as a package.
“In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer,” Carney said.
Even though the potential cuts are small, the bank may trim rates just to keep money flowing to avoid another credit crunch. It could be seen as another confidence-building move to ease worries in the markets and among the general public about credit drying up.
It would be a way of the bank saying “we’re in charge,” said Vicky Pryce, an economist and former joint head of the U.K. government economic service.
The bank has made a series of efforts to maintain confidence since the June 23 vote. Carney has sought to calm markets with his words.
And last week, the bank also moved to free up more money for loans to business and households. It eased controls on capital to help banks lend as much as 150 billion pounds ($200 billion) more, supporting the economy during the uncertainty surrounding the exit from the single European market, which numbers 500 million with Britain in place.
“We have a clear plan. We’re putting measures in place,” Carney has said. “And it’s working.”
Whether the bank cuts rates on Thursday or in coming months, the Brexit vote has set the British economy on a different path and that presents new challenges for a Bank of England still managing the aftershocks of the financial crisis.