Purchasing Managers Index (PMI) surveys have all signalled sharp drops in construction, manufacturing and private sector business activity for July/AFP
LONDON, United Kingdom, Aug 3 – The Bank of England is expected to slash interest rates to a record-low 0.25 percent this week and could pump more stimulus into the economy as it battles the fallout from Britain’s vote to leave the EU, economists say.
The announcement, due Thursday after the British central bank’s latest monetary policy meeting, would take rates to their lowest level in the BoE’s 322-year history
It would also be the first reduction since March 2009, when the bank cut to the current all-time low of 0.50 percent and launched its quantitative easing (QE) bond-buying programme to stimulate lending and growth during the global financial crisis.
Analysts believe the BoE might possibly increase the amount of its QE.
“The BoE is widely expected to ease monetary policy this week in response to … Brexit,” said economist Larry Hatheway at asset manager GAM, adding that inflation was less likely to be on target due to the weaker economic outlook.
“The market anticipates at least a quarter-point cut in the base rate, but an expansion of asset purchases and a ‘bias to ease’ would not be surprises.”
Bright data had showed last week that Britain’s economy accelerated 0.6 percent in the second quarter of this year in the run-up to the shock decision by voters on June 23 to exit the European Union.
However, more recent data has indicated that economic storm clouds are gathering and a recession could be around the corner.
Purchasing Managers Index (PMI) surveys have all signalled sharp drops in construction, manufacturing and private sector business activity for July.
Adding to the gloomy picture is growing evidence of a faltering property market.
The BoE flagged last month that it might deliver an interest rate cut in August in response to the Brexit vote but policymakers did not signal the precise size and nature of any stimulus measures.
In July, the BoE had also maintained the amount of QE cash stimulus pumping around the economy at £375 billion ($497 billion, 448 billion euros).
‘Blown out of the water’
“This week’s manufacturing PMI report is the latest in a long list of survey data which shows that the vote to leave the EU has caused significant uncertainty, and negative shock is on the way,” said Hargreaves Lansdown economist Ben Brettell.
“Prior to the referendum, the UK economy was ticking along quite nicely.
“If the UK had voted to remain in the EU, there is no reason to suspect this trend would not have continued, and as per usual the Bank of England would now be discussing the likely timing of the first interest rate rise.
“The Brexit vote has blown that completely out of the water,” Brettell told AFP.
New British Finance Minister Philip Hammond recently declared that it was up to the BoE to respond to the economic shock arising from Brexit.
Bank governor Mark Carney has warned that Britain could fall into recession as businesses delay new projects and axe jobs due to the uncertainty.
Chancellor of the Exchequer Hammond is meanwhile likely to deliver fiscal stimulus in his autumn budget later this year.
CMC Markets analyst Michael Hewson argued that the BoE should wait and see what Hammond will deliver under the Conservative government of new Prime Minister Theresa May.
“If the new government sees fit to wait until its autumn statement to deliver new fiscal measures, surely it makes sense for the Bank of England to also wait to see what … Philip Hammond delivers later this year and supplement policy that way,” Hewson said.
