All eyes on the Bank of England on Thursday as the UK’s central bank embarks on one of its most important meetings of all time.
The Bank of England is on the brink of cutting interest rates to a new historic low on Thursday lunchtime in an attempt to try and fend off the coming storm in the British economy after the country’s decision to leave the European Union.
On Wednesday, governor Mark Carney chaired the first meeting of the Bank’s nine-person Monetary Policy Committee since the referendum, and at 12:00 p.m. BST (7:00 a.m. ET) the policy decisions made in that meeting will be revealed by Britain’s central bank.
The MPC is the group within the BOE that is responsible for steering monetary policy in the UK by setting interest rates, and inflation targets.
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. But given the economic shock of Brexit — which sent the pound crashing and brought about widespread predictions of recession — the Old Lady of Threadneedle Street is expected to act either this month or next, by cutting interest rates and or launching a new programme of quantitative easing.
A survey in the Financial Times on Monday suggested that markets “have already priced in a 75% chance of interest rates being cut from 0.5% to 0.25% this week.” Bloomberg surveyed 54 economists, with 30 saying that they see a cut of some kind from the MPC meeting. A survey of 13 economists, banks, and trading firms by Business Insider suggested that just over half expect a cut today, while several think that the BoE will wait to take any action, after Carney said that the MPC would use this meeting to make an “initial assessment” of the risks to economy posed by Brexit.
Of those who believe the central bank won’t cut rates, most argue that the MPC’s minutes will cite the fact that we have very little economic data from the post-Brexit period, so we don’t actually know how the vote has actually affected the UK’s economy.
Here are a couple of the best forecasts we received from market participants and economists. Mike van Dulken of Accendo Markets doesn’t expect a cut, and said:
“With little/no data since Brexit it might be foolish to move too quickly. It’s not even been 3 weeks! And he’s the most stable person in office we’ve had since Brexit. No point in ruining it. Lessons learnt from [Mario] Draghi, the President of the European Central Bank,’words speak louder than actions.’ Promise now, deliver later.”
Simon Baptist, the chief economist of the Economist Intelligence Unit has the opposite view, saying:
“It’s a pretty easy call that the MPC will loosen this week. I think this time they will take advantage of the room for a rate cut without going below zero, but the impact of that will be limited as rates are already very low.”
What does a cut mean for the UK?
The basic argument behind the BoE cutting rates on Thursday is that it should, in theory at least, stimulate economic growth by encouraging people to borrow and invest, which in turn will help to spur inflation.
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. For instance, getting an interest rate of more than 1% on a bank account right now is practically unheard of. Putting that in context, 1% interest on a bank account holding £1000 would be just £10 in the first year.
According to a report from the Financial Times on Thursday morning, a cut from the Bank this lunchtime would make mortgages cheaper for as many as five million people in the UK who have things like tracker mortgages, which as their name suggests “track” base interest rates, with repayment rates changing accordingly.
While a cut will make it harder for savers to make a return on their money, that should not in itself affect most people that much. Barclays research suggests that Brits now have the lowest level of gross savings since 2010, while people across the UK generally hold most of their money in less liquid assets like property. Here is a chart from Barclays chart showing just how little cash UK citizens have squirreled away:
One area where a cut could be damaging is in the UK’s pensions sector. As it stands roughly 84% of all UK pension funds are in deficit, meaning that more money will eventually have to be paid out to people than is currently actually in UK pension schemes. The deficit now stands at more than £383 billion, according to research from the Pension Protection Fund, cited by the Financial Times.
Cutting interest rates further will only intensify the problem. Pension funds generally bank on generating a return on investment per year of around 5%. However, with asset classes across the board underperforming, funds only guaranteed source of return is the BoE’s base rate of interest. The lower it is, the worse things are for pension funds.