Belfast Telegraph

Sterling drops after Bank of England governor hints at interest rate cut

French finance minister Michel Sapin said there was no mood to 'punish' Britain for the Brexit vote
French finance minister Michel Sapin said there was no mood to 'punish' Britain for the Brexit vote

Sterling has plunged by more than 1% after Bank of England governor Mark Carney signalled interest rates could be cut over the summer to help boost the UK economy.

The pound dropped 1.5% against the US dollar at 1.324, after Mr Carney said in his view the cost of borrowing should be cut from 0.5%.

However, he said the decision would not be his to take alone and the final call would be made by the Monetary Policy Committee (MPC) during its inflation report in two weeks' time.

He said: "In my view, and I am not pre-judging 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."

He also hinted that the Bank could pump more cash into the economy under its quantitative easing programme and said the Financial Policy Committee could take action when it meets next Tuesday.

His comments fuelled impressive gains on the FTSE 100 Index, which surged to its highest level for nearly a year, closing 2.3% up at 6504.3.

Mr Carney's remarks are a far cry from the MPC's view before the EU referendum when it was predicted the next move for interest rates would be a rise rather than a fall.

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He said Britain was grappling with "economic post-traumatic stress disorder" following the vote to leave the European Union.

He also revealed that the Bank would take further action to ease uncertainty by providing "additional flexibility" in its provision of liquidity insurance by continuing to offer Indexed Long-Term Repo operations on a weekly basis until the end of September.

It comes after he stepped in to calm UK financial markets within minutes after the Brexit decision by pledging to pump in at least £250 billion if needed to prevent a credit squeeze.

In an effort to offer more words of reassurance, Mr Carney said "the UK can handle change", adding "it has one of the most flexible economies in the world and benefits from a deep reservoir of human capital, world-class infrastructure and the rule of law.

"Its people are admired the world over for their strength under adversity. The question is not whether the UK will adjust but rather how quickly and how well."

He said: "Over the past few months, working closely with the Chancellor and with HM Treasury, we put in place contingency plans for the initial market shocks. They are working well."

However, he also warned that "as a result of increased uncertainty and tighter financial conditions, UK households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise".

The Bank of England is expecting UK gross domestic product to hit 2% this year as it comes under fire from increased uncertainty caused by Brexit.

However, economists have been more gloomy in their forecasting, with IHS Global Insight cutting its forecasts to 1.5% from 2% for 2016 and to 0.2% from 2.4% for 2017.

All nine members of the MPC voted earlier this month to keep interest rates on hold at 0.5%, where they have been since March 2009.

Howard Archer, chief European and UK economist of IHS Global Insight, said Mr Carney is likely to have a clear idea of how the MPC will vote on monetary policy in the coming weeks.

" While Mr Carney stressed that this is his personal view and that he did not wish to pre-judge the views of the other independent MPC members, it seems highly unlikely that the Governor is not aware of their thoughts.

"Furthermore, given that the MPC had stressed pre-referendum that they were unanimous in warning of the risks to the UK economy from a leave vote, it would be somewhat strange if all of the MPC (or at least a strong majority) did not believe that looser monetary policy will be warranted."

He added: " There seems little doubt that part of the Bank of England's package will be to cut interest rates from 0.5% to 0.25%.

"While there is a possibility that the Bank of England could eventually take interest rates down to 0.00%, we are far from convinced that they would do this and we doubt very much the Bank of England would take interest rates into negative territory."

The European Union's trade chief said that negotiations on a deal with the UK could not begin until after Brexit.

"There are actually two negotiations. First you exit, and then you negotiate the new relationship, whatever that is," Trade Commissioner Cecilia Malmstrom said.

Between Brexit and the signing of any new trade deal, business between the UK and EU would be conducted under World Trade Organisation rules, she indicated on BBC's Newsnight.

She acknowledged that could damage businesses and economies within the UK and remaining members of the EU: "Yes, but the vote was very clear."