For the past few years, the Bank of England’s MPC meetings have been pretty straightforward affairs, with the policy rate firmly on hold at its record low of 0.5%.
But the referendum result has dramatically changed the British political landscape and amplified the uncertainty over the near and long-term outlook for the UK economy.
A 25bp rate cut today is perhaps not quite the foregone conclusion which markets are almost fully pricing in. The BoE could today make valid arguments both to support a 25bp rate cut and no change.
On balance, however, I think the BoE has more compelling reasons to cut its policy rate 25bp today than to leave it on hold.
First, BoE Governor Carney has made clear that a rate cut was potentially on the cards, making it harder for him to backtrack.
Second, the British economy was showing clear signs of weakness even before the referendum.
Third, there are signs that economic and political uncertainty post referendum are already having a negative impact on consumption, investment and confidence.
Finally, the BoE may be the only game in town for now as there is limited room for domestic fiscal policy and global monetary policy reflation.
But cutting the policy rate to 25bp or even zero is clearly no panacea to the challenges which the UK faces in coming weeks, months and perhaps even years and there are valid counter-arguments as to why the BoE may leave its policy rate on hold today.
These include that the BoE should save its (limited) bullets and wait for more hard data, a BoE rate cut would set in motion self-fulfilling prophecy, the BoE should balance post-referendum chaos with a steady policy rate, the global equity market rebound has removed the sense of urgency and a rate cut could trigger uncontrolled Sterling depreciation.
Regardless of today’s decision, the BoE’s accompanying minutes will likely try to capture this new paradigm.
A rate cut today would still leave the BoE the option of cutting rates again at its 4th August meeting but negative interest rate policy and/or quantitative easing are still likely to be measures of last resort.
Read ‘Bank of England rate cut – Seven years in the making‘ in full.