The Bank of England has suggested interest rate cuts following the Brexit vote, as its governor Mark Carney said the UK economy is showing signs of strain.
The Pound tumbled and shares soared on Mark Carney’s hints that official borrowing costs could be cut further from their record low of 0.5%, perhaps as soon as July.
The Bank’s governor used a speech a week after Britain voted to leave the EU to reassure business leaders and investors that the Bank’s contingency plans were “working well” and that it was considering more measures to safeguard financial stability. The economic outlook for the UK has “deteriorated”, Carney said, as a backdrop of uncertainty takes its toll.
Sterling fell by more than 1% against the euro and dollar on the speech, reflecting an expectation of lower interest rates, softer economic growth and higher inflation, and in late trading, the pound was worth €1.19 and $1.32. The FTSE 100 closed at its highest level so far this year, up by 2.3% at 6,504.33, as investors hoped that looser borrowing costs would improve business and consumer confidence.
The prospect of official interest rates possibly going as low as zero also knocked the yields on UK government bonds, or gilts, to record lows. The first negative-yielding bond appeared following Carney’s speech: a gilt maturing in March 2018 was trading at -0.003%.
Carney said the Bank’s nine member monetary policy committee, which sets interest rates, faces a trade-off between stabilising inflation, which could be stoked by a weaker pound, and shoring up growth and jobs. But he erred on the side of supporting growth with lower borrowing costs.
“In my view, and I am not prejudging 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 in the speech to bankers and business leaders.
“The committee will make an initial assessment on 14 July and a full assessment complete with a new forecast will follow in the August inflation report. In August, we will also discuss further the range of instruments at our disposal.”
Interest rates have been at 0.5% for more than seven years after they were slashed during the UK’s downturn and the global financial crisis. Before the referendum, economists were forecasting that in the event of a vote to stay, the next move in official interest rates would be up.
Carney had warned before the referendum that a vote to leave could cause a technical recession, defined as two consecutive quarters of falling output.
Carney avoided the word “recession”, but reiterated the Bank’s pre-referendum forecast that a victory for the leave camp could “materially alter the outlook for growth and inflation,” with the risk that households and businesses defer investment.