The Bank of England’s package of measures announced yesterday will not stimulate the economy and businesses should be prepared for an uncertain time, warns former MPC member Andrew Sentance.
He argues that the Bank’s move to cut rates by 25 basis points to 0.25 per cent will have “little difference” on savings and borrowing rates, warning that “its stimulus impact is likely to be negligible”.
Sentance says that much of the positive effects of the package of measure will be offset by a weaker pound and a hit to bank profits, which come as a result of the rate cut.
“A weaker pound pushes up business costs and inflation, squeezing disposable income and spending power. The cut in interest rates will also hit bank lending margins, which makes the financial system less secure,” he says.
Finally, he argues that the government needs to do more for the economy to be boosted. This echoes arguments made by CEBR and BoE governor Mark Carney, who warned that the Bank alone cannot boost the UK.
“The economy has suffered a political and structural shock following the Brexit decision. Monetary policy is not the right instrument to offset this shock. We need stronger direction from the government,” he says.
However, he warns that any action from new Chancellor Philip Hammond is not likely to come until autumn at the earliest. “In the meantime businesses need to be prepared to ride out the current period of uncertainty,” he adds.