Will the Bank of England cut interest rates?

  • Posted by Shyam Gokani in Uncategorised
  • May 10, 2016
  • No Comments

Sterling steadied this morning after hitting a two-week low against the dollar on opinion polls showing the outcome of June’s referendum on European Union membership was on a knife edge.

Short-term market interest rates now price in a substantial chance of a Bank of England cut by the end of the year, a reflection of concerns over what Brexit – or the turbulence caused by the vote alone – will do to economic growth.

In normal circumstances, the Bank of England might be close to pumping more stimulus into Britain’s economy, given recent signs of a sharp slowdown in growth and a rise in the number of people out of work.

But Governor Mark Carney and his fellow rate-setters are all expected to take a wait-and-see approach this week, effectively dismissing most of the slowdown as due to temporary jitters before Britain’s historic European Union referendum on June 23.

A Reuters poll of economists predicted that the nine members of the Monetary Policy Committee will maintain their united front and vote unanimously to keep borrowing costs on hold at their record-low 0.5 percent.

One poll on Monday showed the “In” campaign with a 2 percentage point lead ahead of the June 23 vote, while another showed the same margin in favour of leaving.

Sterling retreated from four-month highs last week after weak surveys of manufacturing, construction and services highlighted the economic risks posed by the vote. They indicated the economy was on track for quarterly growth of 0.1-0.2 percent, down from 0.4 percent in the first quarter.

The BoE’s monetary policy committee meets this week and the Bank, which has warned about the economic risks of Brexit, will release updated growth and inflation forecasts in a quarterly report on Thursday. Governor Mark Carney will address a news conference the same day.

The world’s biggest staffing agency Adecco said on Tuesday that speculation that Britain might vote to leave the 28-country bloc was hitting demand for highly skilled finance jobs.

Surveys also suggested British shoppers held off from buying new spring and summer clothes during an unusually cold April, compounding a sense of uncertainty among consumers ahead of the vote.

Many economists believe leaving the EU would deal a blow to the British economy, with the current account gap of 7 percent of GDP leaving it vulnerable to any pull-back in investment flows.

The pound will remain sensitive to both political comment and new polls regarding the EU referendum, with position shuffling expected ahead of the quarterly Inflation Report.

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