Will Mark Carney be wielding his sledgehammer tomorrow? The markets are convinced he will, with the Bank of England expected to deliver its first cut in interest rates since 2009.
The overwhelming view of economists, many of whom were shocked when the bank failed to act last month, is that Threadneedle Street will cut interest rates from 0.5 per cent to a new historic low of 0.25 per cent.
Many also expect an expansion of the existing £375 billion quantitative easing programme, which has been on hold for the past four years, with forecasts ranging from an extra £50 billion to £100 billion. Another possibility is the reintroduction of the Funding For Lending Scheme, under which high street banks are incentivised with access to cheap finance to increase their lending to individuals and business borrowers.
Recent poor survey data, including a steep decline in manufacturing activity in the wake of the Brexit vote, have underlined the case for the bank to act. Carney himself has dropped heavy hints that he expects action over the summer and the bank’s chief economist, Andy Haldane, has been even more forthright.
Muscular action
In a speech last month, Haldane made it clear that he supported prompt and "muscular" action by the Bank: "I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison – like another Andy, the one in The Shawshank Redemption.
“And yes, I know Andy did eventually escape. But it did take him 20 years. The MPC [Monetary Policy Committee] does not have that same luxury.”
Carney and Haldane are two of the nine members of the MPC, the bank’s rate-setting committee, which will make the decision on how to tackle the fallout from Britain’s shock decision to leave the European Union.
But while the markets are convinced the bank will act decisively tomorrow, not everyone agrees that it should. Former MPC member Dame Kate Barker argued strongly yesterday that any reduction in rates at this stage could do more harm than good and might actually prove negative for the economy.
It’s not that she thinks the impact of the Brexit vote has been overstated; indeed, she says it’s “amply clear” it has been a negative shock. The only question is how large a shock.
In her view, the Brexit fallout should be tackled by the government moving to loosen fiscal policy, allowing the deficit to rise, rather than by a rate cut from the central bank that is unlikely to have much of an impact on the behaviour of individual borrowers or corporate investors.
“The economy is slowing – and the cry is for a confidence-boosting cut in the bank rate. But I fail to see why a policy move which will prove bad for the economy should have that effect,” said Barker, who was a member of the MPC for nine years.
Repent at leisure
Analyst Michael Hewson of CMC Markets was more succinct in his advice to Carney and the rest of the bank’s policy makers. “Act in haste, repent at leisure,” he warned.
He contends that it is still to early to establish the extent of the damage done by the June referendum, irrespective of the recent gloomy surveys and confidence data. With rates already at record lows, Hewson, like Barker, says it is not immediately apparent what a further rate cut would achieve.
Acting now in the absence of hard data “runs the risk of the market tail wagging the policy maker’s dog, and could see any further action backfire”, he said.
That’s the dilemma for the bank, although it will also be keen not to wrongfoot the markets too badly for a second month. A split decision by the committee is a distinct possibility.
Along with the rates decision at midday tomorrow, Carney will also release the latest quarterly inflation report, which will include new growth and inflation forecasts.
With sterling having lost more than 10 per cent of its value in the past few weeks, forecasts for inflation will be sharply higher, taking the cost of living above the government’s 2 per cent target next year.
As for growth, ahead of the Brexit vote, the Bank had been expecting the UK economy to expand by 2.3 per cent this year. Analysts are now expecting that figure to be slashed to less than 1 per cent , or even zero.
If the downward revision is of that order, it will be the largest-ever cut in the bank’s growth forecasts since Threadneedle Street was given its independence almost 20 years ago.
Fiona Walsh is business editor of theguardian.com
