Bank of England Rate Cut Still on the Cards for August?

Bank of England interest rate cut coming

It’s not just consumers who are feeling uncertain over making major financial commitments since the UK voted to exit the European Union. A recent survey by the Bank of England (BOE) shows that businesses up and down the country are feeling uncertain over what’s going to happen in the UK in the next 12 months now the country is no longer part of the EU.

The regional agents survey was conducted both before and after the referendum, capturing the mood since Brexit became reality. Businesses who spoke with BOE agents – described as the eyes and ears of the central bank – expressed a marked increase in uncertainty after the vote.

“A majority of firms spoken with did not expect a near-term impact from the result on their investment or staff hiring plans,” the survey read. “But around a third of contacts thought there would be some negative impact on those plans over the next twelve months.”

While there was a clear positive message that firms are keeping current plans in place the uncertainty over the longer-term was less positive. Businesses are similar to consumers, if they’re worried or feeling poorer then they curb their spending. That suggests any new business plans might not contain as much investment as previous plans.

Despite the notes of optimism from UK businesses, economists are still expecting BOE governor Mark Carney to announce some form of stimulus when the central bank meets in August. The Bank surprised financial markets and analysts in July when it voted 8-1 to keep interest rates on hold. A rate cut had been widely expected following comments from Governor Carney that the Bank should do what it can to support the UK economy following the shock of the Brexit vote.

Howard Archer, chief UK economist at IHS Global Insight, said: “While there may be some relief that the economy may have dodged an immediate sharp slowdown from the Brexit vote, the danger is still very much there given the major uncertainty that is apparent – and there seems a compelling case for the Bank of England to deliver a substantial package of measures at its August meeting to try and bolster business and consumer confidence.”

If the Bank does vote for a rate cut when it next meets in August, it should give a boost to borrowing and spending as borrowing rates on things like mortgages and loans tend to fall when the central bank cuts ‘Bank Rate’ as it is known. ‘Bank Rate’ currently stands at a record low of 0.5% with expectations for it to be cut to 0.25% as well as additional action that will help support the economy, bolster confidence and encourage spending and investment.

When businesses limit their spending that doesn’t just mean they don’t have the funds to invest in new machinery, premises or training it also means they’re less likely to raise wages or employ more staff. That’s not good news for regular, working Britons, so a rate cut and additional central bank action would support both businesses and consumers.

And, if mortgage rates fall further that would also be a boost to the housing market as if would make buying a house more affordable. Good news for those in a solid financial position and the desire to buy a home in these uncertain times.

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April 21, 2017 8:01 am

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