Markets predict Bank of England rate cut after Brexit

BoEExperts are 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.

A number of experts have claimed that the Bank of England will cut interest rates from their current record low of 0.5 per cent following the UK’s vote to Brexit.

Howard Archer, chief UK and European economist at IHS Global Insight, says the firm now expects the Bank to cut rates to 0.25 per cent.

Pimco expects a greater cut, to 0 per cent. Joachim Fels, global economic adviser at Pimco, says: “We expect the Bank of England to cut its official interest rate from 0.5 per cent to zero relatively soon and, if more is needed, to restart quantitative easing.”

Swaps markets are now also pricing in a 15 per cent chance of UK interest rates turning negative in the next 12 months.

Those same swap markets are pricing in a 50 per cent chance of a rate cut next month, and an 80 per cent chance of a cut by the end of the year.

Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “The Brexit vote has substantially moved the dial on interest rate expectations, with markets now pricing in a significant chance of rates going negative in the UK.

“The Bank of England may soon find itself between a rock and a hard place, if the economy and inflation start pointing in different policy directions. That’s because although the Brexit vote has increased economic uncertainty, it has also taken a toll on Sterling, which is likely to feed through into inflation because it makes imports that much more expensive.

“This raises the uncomfortable prospect for the central bank of cutting interest rates while inflation is rising, something it has proved it is willing to do in the past in order to boost the economy.”

Following the UK’s vote to Leave the EU in the referendum, Richard Buxton, head of UK equities and chief executive at Old Mutual Global Investors, said that rate cuts and a restarting of QE by the Bank of England were back on the table.

“It is difficult to say at this stage what action the Bank of England may take, but it is not impossible to imagine that it may quickly cut interest rates,” he said.

“Restarting the programme of quantitative easing – a feature that has been absent from the economic landscape for some three years now – also looks a possibility. At the very least, the central bank is likely to indicate its preparedness to take such action.”