The Bank of England is on the cusp of cutting interest rates to a new historic low again on Thursday in a bid to mitigate an impending economic slowdown caused by a Brexit.
According to a survey in the Financial Times, markets “have already priced in a 75% chance of interest rates being cut from 0.5% to 0.25% this week.“
One analyst, for example, Jonathan Loynes of Capital Economics told the FT: “We think the [Monetary Policy] Committee will recognise the dangers of disappointing market expectations and cut the Bank rate by 0.25%.”
Britain’s interest rates have been at a historic low of 0.5% since March 2009 and before Britain voted to leave the European Union on June 23, the BOE was priming itself to eventually start raising rates again.
Low interest rates makes borrowing cheaper — so for people with debt this is great because your monthly repayments are smaller. However for those with savings, it’s a death knell for returns, because you are barely growing your savings pot.
BOE governor Mark Carney already reiterated at a press conference on July 5 that the BoE is ready to inject as much as £250 billion ($324 billion) of extra capital into the financial system, in case of an economic downturn caused by a Brexit, by saying: “The Bank of England is also able to provide substantial foreign currency liquidity if needed.”
He also said the central bank is doing everything it can to ensure stability, and that it has “a clear plan” and “we are rapidly putting its main elements in place, and it is working.“
Now analysts believe that those “elements” include cutting interest rates to 0.25%.
On July 5, Carney relaxed lending limits for banks so it would mean the ordinary person on the street and businesses would not feel an economic downturn:
“Our actions [on July 5] alone have released up to £150 billion in new lending capacity to UK businesses and households.”
Three-quarters of British banks will immediately have greater flexibility to lend as a result of these measures, he added.
Some markets are already acting crazy in the Brexit vote aftermath. Sterling is already hovering close to 31-year-lows against the dollar and some banks predict that the currency will fall much lower.
Deutsche Bank forecasts that the pound will reach $1.15 against the dollar by the end of the year, against the current exchange rate of just shy of $1.30, and it reckons a euro will buy you 90p, up from its current rate of 85p. The forecast follows an equally pessimistic call from Goldman Sachs earlier this month, which said the pound could hit $1.20 soon.