With the British economy in its deepest trouble since the global financial crisis in the wake of the vote to leave the European Union, the Bank of England is expected to unveil Thursday stimulus measures including a rate cut and, possibly, the creation of billions in new money.
Early indicators since the June 23 vote suggest that the economy is contracting at its sharpest rate since 2009.
Manufacturing, services and consumer spending are falling, the pound is down 10 per cent and questions linger over what trade relations the country will have with the rest of the EU in coming years.
As a result, the Bank of England is expected to cut its key interest rate from a record-low 0.5 per cent on Thursday, diverging from policymakers at the US Federal Reserve who in December raised their benchmark for the first time in seven years.
The bank may also expand its stimulus program called quantitative easing under which it buys government bonds from banks with newly created money, effectively pumping extra money into the economy.
“The Bank of England should throw the kitchen sink at the problem,” wrote Robert Wood, an economist at Bank of America/Merrill Lynch. “The worst thing that could happen now is the stimulus does not work, so better to do too much.”
The Bank of America Merrill Lynch analysts forecast a 0.25 percentage point rate cut, an additional 50 billion pounds (USD 67 billion) of bond-buying and other efforts to stimulate lending.
The expectations of such action grew after a gauge of business activity published last week and closely watched by investors and policymakers fell in July to its lowest since early 2009. The survey of 1,200 company executives covers manufacturing and services and showed a broad-based decline in production, orders and hiring intentions.
Another study released last month raised concern that the impact of leaving the EU may be felt for 10 years or more â€” longer than previously expected. Some 71 per cent of leading academic economists surveyed by the University of Chicago said inflation-adjusted incomes in the UK will likely be lower a decade from now than they are today because of the British EU exit, or Brexit.
“A post-Brexit agreement between the UK and the EU is likely to involve trade barriers,” said Oliver Hart, a British-born economist at Harvard University. “This will reduce gains from trade. The UK will suffer.”
One of the main concerns is that the immediate drop in confidence caused by the vote could become ingrained, with employers delaying expansion and hiring and consumers putting off purchases of big-ticket items such as cars and appliances.
Bank of England Governor Mark Carney foreshadowed a response by the bank’s Monetary Policy Committee in a June 30 speech.
“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,” Carney said. He noted that some of the risks to the economy predicted before the referendum are taking hold. (AP) AJR 08031630