The Bank of England will consider the first interest rate cut for more than seven years this week, as it seeks to contain the economic fallout from the Brexit vote.
Some City economists predict that with consumer confidence battered and businesses nervous about spending and hiring, the Bank will want to shore up sentiment by reducing interest rates further from a record low of 0.5%.
The Bank’s governor Mark Carney has dropped heavy hints of a summer rate cut but he and fellow rate setters may want to see more evidence of the Brexit vote’s impact before acting. The nine-member monetary policy committee will announce its decision on Thursday at midday and experts say it has a range of options – including doing nothing for now.
Forecasts for what policymakers will vote to do in the wake of the referendum vary from keeping rates on hold to slashing them by 50 basis points to zero. Some say the committee will go for a smaller 25 basis point cut, leaving itself the option to cut again in August when it also publishes new economic forecasts and will have a better sense of how the EU referendum result has affected the UK.
Carney laid the groundwork for a rate cut in a carefully orchestrated market intervention a week after the Brexit vote wrongfooted investors. Speaking as the pound was plumbing 31-year lows and shares in banks and housebuilders tumbled, Carney said his personal view was that “some monetary policy easing will likely be required over the summer”.
That marked a complete turnaround from the pre-referendum pattern of Bank policymakers seeking to guide markets on when rates might rise again, after more than seven years at 0.5%. Official borrowing costs were last cut in March 2009 when the UK was in recession and they have been on hold ever since.
Philip Shaw, an economist at City bank Investec, said: “This state of policy inaction is about to change. The question … has become not if the MPC will ease but what, how much and when.”