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Expected interest rate cut could provide post-Brexit vote boost

Published 08/07/2016

Governor of the Bank of England Mark Carney has signalled a possible cut in interest rates
Governor of the Bank of England Mark Carney has signalled a possible cut in interest rates

The economy could be given a post-Brexit vote boost next week as expectations mount that the Bank of England will cut interest rates to a new historic low.

Bank governor Mark Carney has already signalled policymakers on the Monetary Policy Committee (MPC) w ould vote to slash rates over the summer, suggesting a cut in July or August.

Economists at Hargreaves Lansdown said it was "now probable" rates will be cut on Thursday , with financial markets pricing in a reduction f rom 0.5% to 0.25%.

They said it was possible rates may also be lowered to zero in August as the Bank struggles to bolster flagging growth and contain the fallout of Britain's vote to leave the EU.

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

Ben Brettell, senior economist at Hargeaves Lansdown, said: "Initially August had looked more likely, but with economic data deteriorating and markets still nervous, it now looks probable the MPC will adjudge that immediate action is warranted."

Recent signs for growth have been worrying, with industry surveys for the services sector and the construction industry pointing to a sharp slowdown, with the latter experiencing its worst month in seven years for June.

Mr Carney also said on unveiling the Bank's Financial Stability Report that Brexit risks to the economy had started to "crystallise".

The pound tumbled to fresh 31-year lows on the economic gloom.

Interest rates have remained at 0.5% since March 2009, when they hit emergency lows amid the financial crisis.

Mr Carney had indicated only last summer that rates may need to rise "around the turn of the year", but Britain is now facing the reality of zero, or even negative, rates.

Mr Carney has been quick to stress he is personally reluctant to reduce rates lower than 0.25% or into negative territory.

He said in a recent speech: "As we have seen elsewhere, if interest rates are too low or negative, the hit to bank profitability could perversely reduce credit availability or even increase its overall price."

Howard Archer, chief economist at IHS Global Insight, said the Bank would look to use other monetary policy tools as well as cutting rates to 0.25% in either July or August.

"We also suspect that the Bank of England will extend its Funding for Lending Scheme and it may very well also return to Quantitative Easing, which has been on hold since November 2012 with the stock of purchases at £375 billion," he said.

The Bank has unveiled a series of measures to help limit the Brexit blow, relaxing banking rules to boost their lending firepower by up to £150 billion and pledging to pump in at least £250 billion if needed to calm markets in the immediate aftermath of the Brexit decision.

And the Chancellor George Osborne has said the Treasury stands ready to expand the Funding for Lending scheme, which offers banks cheap access to finance on the basis that they lend more.

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