Mark Carney, governor of the Bank of England, has signalled that the bank will cut interest rates or restart QE this summer, following the UK’s decision to Brexit.
In a speech, Carney says that the economic outlook for the UK “has deteriorated” following the EU referendum vote.
He adds that “some monetary policy easing will likely be required over the summer”.
The Bank will devise an initial assessment, to be published in two weeks, while a full assessment and new forecast will be published with the August inflation report.
“As required by its remit, the MPC has already described how a vote to leave the EU could materially alter the outlook for growth and inflation,” says Carney.
“As a result of increased uncertainty and tighter financial conditions, UK households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise. Through financial market and confidence channels, there are also risks of adverse spillovers to the global economy.
“At the same time, supply growth is likely to be lower over the next three years, reflecting slower capital accumulation and the need to reallocate resources across sectors of the economy. Both of these forces may be exacerbated by higher uncertainty and tighter financial conditions.
“Finally, as expected, sterling has depreciated sharply. For given foreign demand, this will mean support to net trade, though this may well be dampened by uncertainty around future trading relationships. A lower exchange rate will also entail higher prices for imported consumer goods, energy and capital goods, and consequently lower real incomes.”
Carney acknowledged that interest rates being too low or negative would hit bank profitability, which in turn could hit the availability and price of credit.
He adds that in the coming weeks the Bank “will consider a host of other measures and policies to promote monetary and financial stability”. However, he acknowledges there are limits to what the BoE can do.
“In particular, monetary policy cannot immediately or fully offset the economic implications of a large, negative shock. The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policymakers,” he says.
The price of sterling has dropped on the news, with previous gains for the day being wiped out. It is now down 1.38 per cent against the dollar today, to $1.3262. Conversely the FTSE 100 rose, to end the day up 2.27 per cent.
Ben Brettell, senior economist at Hargreaves Lansdown, says: “Once again we seem to be in a world where a few words from a central banker can move markets in an instant.
“Earlier this afternoon, before Mark Carney’s speech, the FTSE and sterling were broadly flat on the day. Following the governor’s words, the FTSE has just closed within a whisker of its highest level year-to-date, while sterling has lost a cent and a half against the dollar and more than a cent against the euro. Stock markets clearly love monetary stimulus far more than they hate Brexit-related uncertainty.
“Carney and his MPC colleagues could face a delicate balancing act over the coming months, balancing higher inflation caused by the weaker pound with the need to stimulate growth. If history is anything to go by, growth will be the priority – remember the Bank was willing to ‘look through’ elevated inflation in the first phase of the financial crisis and cut rates to their current lows.”
Experts were already predicting an interest rate cut from the Bank of England, following the UK’s decision to leave the EU, with markets now pricing in a 15 per cent chance of negative rates within a year.