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Bank of England poised to cut interest rates to 0.25%

Published 03/08/2016

Bank of England governor Mark Carney signalled in the wake of the Brexit vote that interest rates would come down in July or August
Bank of England governor Mark Carney signalled in the wake of the Brexit vote that interest rates would come down in July or August

The Bank of England is expected to push the button on the first cut in interest rates for more than seven years on Thursday as the economy falters in the wake of the Brexit vote.

Economists predict that policymakers on the Bank's Monetary Policy Committee (MPC) will vote to slash rates to a new historic low in an effort to ward off the threat of recession.

Ben Brettell, senior economist at Hargeaves Lansdown, said it was "almost certain" that rates will be cut, with financial markets pricing in a reduction from 0.5% to 0.25%.

Policymakers may also look to use other economy-boosting measures, possibly firing up the money-printing presses once more to expand its £375 billion quantitative easing programme.

A rate cut would be the first since March 2009, when the Bank slashed rates to the all-time emergency low of 0.5% at the height of the financial crisis.

It would be good news for borrowers, but spell further misery for long-suffering savers.

The Bank of England has repeatedly signalled that measures to bolster the economy are on the way, saying at its last interest rate decision that most MPC members expected to take action in August.

Bank governor Mark Carney signalled in the wake of the Brexit vote that rates would come down in July or August and the MPC surprised economists and investors when it kept rates on hold last month.

While last week's gross domestic product (GDP) figures estimated a better-than-expected 0.6% rise in the second quarter, this is expected to have gone into sharp reverse since the Brexit vote.

Closely-watched purchasing managers' index (PMI) surveys on the three major sectors of the economy pointed to a record fall in activity last month and raised recession fears.

The readings signalled a shock contraction in the dominant services sector for the first time since the end of 2012 and the biggest monthly fall in activity on record.

The all-sector PMI suggested a 0.4% fall in GDP in the third quarter.

Markit chief economist Chris Williamson warned the result "undoubtedly" raised the risk of a mild technical recession - two quarters in a row of falling GDP.

A report from the National Institute of Economic and Social Research (NIESR) also cautioned that there was a 50/50 chance of a recession over the next 18 months.

Jack Meaning, a research fellow at NIESR, said the Bank needs to use a "sledgehammer" to offset a deepening downturn in the economy.

The Bank's latest forecasts due to be published in its quarterly inflation report, which will be published alongside its interest rate decision, will be scoured for signs of recession.

Mr Carney warned in May that a Brexit vote could trigger a recession and has since said many of the risks previously flagged up have begun to "crystallise".

Financial markets have been surprisingly resilient, but the pound has plunged in value, consumer confidence has fallen sharply and there are signs of strain in commercial and residential property markets.

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