The Bank of England has held interest rates at a record low of 0.5% since March 2009.
However, in the event of Britons voting for a Brexit — the UK leaving the European Union — in the June 23 referendum, the BoE is poised to cut rates further, according to a report in The Sunday Times:
One bank chief executive said he had been invited to Threadneedle Street for an “informal discussion” and was encouraged to check whether the bank’s balance sheet could withstand a rate reduction. “This is something the Bank has been suggesting for some time,” said another bank boss.
A cut would be a surprise but might come into play if a Brexit vote brought a drastic slowdown or recession. The Bank declined to comment.
This means the central bank would pushing the UK’s interest rate to nearly 0%. Considering this was broadly seen as unlikely over the last year, due to the prolonged period of low interest rates, this marks a realistic potential for governor Mark Carney to consider what lots of central banks across the world have been doing — installing negative interest rates.
Negative rates are already in place in the eurozone, as well as Japan, Sweden, and Denmark among others.
Negative interest rates are intended to encourage borrowing, discourage upward pressure on currencies, and help trade.
In April at the most recent Monetary Policy Committee meeting, rumours surfaced that certain members were considering voting to cut interest rates. Those votes didn’t materialise, but it did increase speculation that the bank may go lower if economic conditions don’t continue to improve.
The International Monetary Fund (IMF) has already warned that a Brexit is a “real possibility” and could cause “severe regional and global damage.”
In the fund’s latest update of its World Economic Outlook, the institution often called the central banker’s central bank said that Brexit “could weigh heavily on confidence and investment, all the while increasing financial market volatility” and argued that the upcoming referendum has already created uncertainty for investors.
Alongside the gloomy predictions about what will happen if the UK votes for Brexit, the IMF also cut forecasts the UK’s GDP growth in 2016.
In April, the CEO of JP Morgan Jamie Dimon said that Brexit could plunge Europe into the “unknown” and in mid-March, Goldman Sachs warned that Britain leaving the EU could have a devastating impact on British companies.