Experts forecast BoE to cut rates soon

By Gokhan Kurtaran

LONDON

At its second monetary policy meeting after Brexit on Thursday, the Bank of England (BoE) is set to cut its benchmark rate, predict senior economic experts.

Experts believe at the meeting the BoE will cut the benchmark rate by 25 basis points, which it has maintained at a historic low since 2009.

Anticipation of a cut is bolstered further by minutes of the previous monetary policy meeting, which suggested August might be the time to decide for a rate cut.

Robert Wood, economist at Bank of America Merill Lynch, said they expect a cut to 0.25 percent and some fresh quantitative easing and credit-easing measures, highlighting the limited power of the central bank and the need for fiscal policy measures.

“The fundamental issue with all the monetary policy tools we can think of is that they are close to pushing on a string,” wrote Wood and strategist Sebastien Cross.

But some economists argue that the bank should save an interest rate cut instrument for negative data which may come in the months ahead, rather than use it in the short term.

In The Telegraph, Kristin Forbes of the BoE’s Monetary Policy Committee wrote that financial markets had “stabilized” following an initial “panic,” while measures of consumer spending, which drive around two-thirds of UK output, “do not suggest consumers are cutting back.”

The MIT professor said it was important that policymakers kept an eye on the impact of the drop in the pound on prices, even if the “substantial uncertainty” triggered by the referendum result meant that it was likely that growth would slow.

Forbes said the weaker pound and the easing of bank buffers to free up more money for lending had already provided more stimulus to the economy.

Inflation could overshoot the bank’s 2 percent target even without additional easing, she warned.

However, senior economists anticipating a rate cut as soon as the next monetary policy meeting due Thursday outnumber economists thinking in line with Forbes, who has a rather cautious stance.

“[Brexit] is one of the biggest economic shocks in recent memory. I think there’s a comprehensive package coming from the BoE,” said Alan Clarke, an economist at Scotiabank.

Another expert, Allan Monks, economist at JP Morgan, echoed the view from Clarke, claiming only the amount of the cut and its type is to be decided at the meeting.

“The Bank of England seems all but certain to ease policy, with only the scale and form of easing in question,” Monks said.