Bank of England meeting could discuss cutting interest rates

A recent run of bad news on the economy may have chipped away at Mark Carney and other policymakers’ certainty on the path for interest rates

The Bank of England’s interest rate setters meet against a gloomy economic backdrop this week that could prompt at least one policymaker to push for a cut in borrowing costs to shore up stalling growth.

The nine-strong monetary policy committee (MPC) is not expected to make any changes to the record low base rate of 0.5% on Thursday. But investors will be scouring minutes of the latest meeting and the Bank’s new forecasts for the economy released at the same time for clues as to whether the next move will be up or down.

“A run of weak activity surveys for April suggest that the economy may see growth in the second quarter slow compared to the first quarter’s already insipid performance,” said Martin Beck at the consultancy Oxford Economics.

“Uncertainty caused by June’s EU referendum has been widely blamed. But with the economy slackening well before the referendum date was announced, it is difficult to believe that this is the only story. One thing that is clear is that the possibility of a cut in interest rates is looking ever less outlandish.”

Markets are not pricing in any policy move this year and the Bank’s policymakers have also signalled that rates are going nowhere for now, given the upcoming referendum on EU membership is clouding the economic outlook. At the same time, there has been a clear message from governor Mark Carney that when there is a change in borrowing costs it is more likely to be up than down.

However, a recent run of bad news on the economy may have chipped away at Carney and other policymakers’ certainty on the path for interest rates, say experts. The committee could discuss cuts at this meeting even if most members are not close to voting for such a move.

Both the Bank’s chief economist, Andy Haldane, and external MPC member Jan Vlieghe have discussed the possibility of cutting rates in the past. As such, they are seen as the most likely to push for lower borrowing costs after business surveys last week added to signs that the UK economy is losing momentum.

Last week’s PMI reports on the main sectors of Britain’s economy showed growth had dropped to the weakest pace in three years for construction firms, manufacturers and Britain’s vast banks-to-bars services industry. The surveys’ compilers, Markit, said that pointed to GDP growth of just 0.1% in April, down from 0.4% in the first quarter of the year.

On the high street, the demise of BHS and Austin Reed has fanned fears that the consumer engine driving Britain’s economy is stalling.

The signs from the global economy have also been worrying investors, including news on Friday that the US added far fewer jobs than expected last month.

Another issue that will be troubling UK policymakers is the EU referendum on 23 June. The Bank has already warned that businesses will likely defer spending decisions until after the vote, knocking overall economic growth in the second quarter of the year. But presenting the Bank’s latest “inflation report” forecasts on Thursday at a news conference, Carney may be careful not to venture further into the Brexit debate.

Chris Hare, an economist at the bank Investec, commented: “From a communications perspective, this inflation report will be extremely awkward for the MPC.”

“Issues relating to the vote are clearly affecting the MPC’s read of the economy and its monetary policy outlook. But, at the same time, the committee might naturally shy away from wading further into a highly charged political debate.”

“All told, we expect this Super Thursday to see the MPC very much in ‘wait and see’ mode as it rides out the communications challenges of the EU referendum.”

According to the Sunday Times, the Bank has held ‘informal discussions’ with UK banks over whether their balance sheets could handle a rate cut.

New economic indicators published today will do little to assuage fears the economic is losing steam.

Business activity and employment lost momentum across England and Wales in April, according to the latest Lloyds Bank regional purchasing managers’ index.

The survey’s measure of business activity across England’s private sector was the lowest for more than three years. Wales’s business activity index registered its second-lowest reading since February 2013. But it still showed a faster rate of growth than the average across England for the third month in a row.

Companies said last month’s introduction of the ‘national living wage’ was weighing on hiring.

“The majority of regions have started the second quarter on a weaker footing, with business activity no longer showing the robust growth that we have seen over the past two to three years,” said Tim Hinton, managing director for mid-markets and SME banking at Lloyds Banking Group.

“A knock-on effect of stronger cost pressures from the ‘national living wage’ and higher fuel prices has seen a slowing in the rate of job creation, which was at a 32-month low in April.”

A separate report from accountants BDO suggested that UK firms’ hiring intentions had fallen sharply to levels last seen in 2014. But its Business Trends Report suggested firms remained upbeat about growth in the coming six months.


Katie Allen

The GuardianTramp

Related Content

Article image
UK interest rates set to be cut by Bank of England on Thursday
Bank will publish the latest inflation report and growth forecasts this week

Katie Allen

31, Jul, 2016 @2:53 PM

Article image
Bank of England walks the tightrope over interest rates
Rising inflation is pressuring Bank governor Mark Carney to raise the current 0.25% rate even as UK economic growth slows

Katie Allen

08, May, 2017 @9:51 AM

Article image
Bank of England interest rate decision: what MPC members have said
As the Bank prepares for its latest move, here’s what monetary policy committee members have said since their last vote

Angela Monaghan

03, Nov, 2016 @8:22 AM

Article image
Interest rates may be cut, suggests Bank of England chief economist
Andrew Haldane’s view on tackling deflation risk strikes markedly different tone to governor Mark Carney, who said it would be foolish to cut rates now

Heather Stewart

19, Mar, 2015 @2:32 PM

Article image
Fresh signs of slowdown will force interest rates rise to be put on hold
Bank of England unlikely to produce any fireworks with multiple reports on 5 Novermber as clutch of surveys highlight uncertain outlook for UK businesses

Katie Allen

02, Nov, 2015 @12:01 AM

Article image
Bank of England must be wary of interest rate rise, says chief economist
Andy Haldane says UK at risk of sharp slowdown as BoE weighs up conflicting forces of inflation from weak pound and the Brexit vote denting confidence

Katie Allen

02, Dec, 2016 @2:37 PM

Article image
Interest rates can stay low for longer, says Bank of England deputy chief
Jon Cunliffe says factors such as weaker growth means current level can be maintained for longer than previously thought

Katie Allen

28, Oct, 2014 @7:47 PM

Article image
Bank of England decision to keep 0.5% interest rate was unanimous
All members of monetary policy committee rejected rate rise after previously split votes while analysts say likely coalition negotiations will delay changes

Heather Stewart

22, Apr, 2015 @11:32 AM

Article image
Bank of England votes 9-0 to keep interest rates on hold
Prospect of UK rate rise recedes further as Bank cuts forecasts for economic growth, wages and inflation

Katie Allen

04, Feb, 2016 @12:14 PM

Article image
Bank of England is unlikely to raise rates before unemployment falls to 7%

Governor Mark Carney could come under pressure from hawks on the MPC to raise interest rates if inflation begins to rise

Phillip Inman economics correspondent

15, Sep, 2013 @5:30 PM