The economic outlook expected to be delivered by the Bank of England tomorrow is set to have a much bigger impact on markets than a likely rate cut or more quantitative easing, experts say.
On Thursday the Bank of England will decide on its next interest rates move with markets pricing in a rate cut with near certainty.
Most commentators expect a 25 basis points cut bringing rates to 0.25 per cent and potentially an announcement of more asset purchases.
But Architas investment director Adrian Lowcock says it is more important what Bank of England governor Mark Carney and the central bank say tomorrow after the monetary policy announcement rather than the actual actions from the bank.
Lowcock says: “If Carney comes out with a negative market outlook that would be worse for companies, like banks, rather than what the bank is going to do with interest rates or further QE.
“This is the most priced in rate cut we had, but the actual impact on markets would be if they don’t make any move. A quarter rate cut is not significant and it is not a big impact in the economy.”
CMC Markets chief market analyst Michael Hewson says the market is pricing a rate cut from the BoE largely as a result of the expectations that have been built up in the aftermath of June’s Brexit vote.
He says: “In essence the central bank has boxed itself into a corner, and despite recent data should really be asking itself whether it would be wise to act at all this week.”
But AJ Bell investment director Russ Mould says it would be “embarrassing” if the BoE doesn’t make a move on rates.
He says: “Since 24 June the market has been pricing in a monetary policy easing. But although GDP and employment data are still strong, they are lagging indicators.”
The day before the rates announcement, the UK services sector, the most significant part of the economy, suffered its worst monthly fall in PMI in two decades.
Service sector PMIs fell to 47.4 in July from 52.3 a month earlier, the largest monthly decline since the survey began in 1996.
Earlier in the week, manufacturing PMIs revealed the sharpest contraction since early 2013, while construction showed its sharpest contraction since the height of the financial crisis in 2009.
However, Hewson says: “As a result of the current uncertainties – and given what’s at stake – it remains highly likely that Thursday’s vote could be a split one, which means there is a fair chance that the bank may well fail to deliver on market expectations.”
Experts question whether a rate cut would actually work and whether other monetary measures would be effective.
Hargreaves Lansdown senior economist Ben Brettell says whether lower interest rates will work is also “a moot point”.
He says: “In many ways by talking about a rate cut the Bank has already achieved much of the intended effect, with the cost of borrowing falling across the board.
“However it’s difficult to see a cut moving the dial too far in the real economy. Money is already cheap, and while lower rates will reduce borrowing costs slightly, they aren’t going to significantly alter corporate or consumer behaviour.”
Brettell argues interest rates could remain where they are for five to ten years.
He says: “With bond yields also flat on their back, and property suffering its own problems, the only game left in town is the stock market, though a long-term view is essential.”
Mould says with a rate cut, dollar and overseas earners, including pharmaceuticals, will have a boost. Discretionary consumer, utilities and tobacco firms might also “get a lift” while banks and insurers would suffer.
He says: “Given that we are seven years in a low rates environment and the currency is still doing OK, we don’t know what a rate cut would really change. Clearly monetary policy is reaching a limit.”
Lowcock says measures like QE globally are having a “diminishing power” and questions what effect a further stimulus would be for markets, unless it would be “massive”, in case of the UK.
He says: “The job of the BoE is to stimulate the economy but interest rates and QE are becoming a less powerful tool.
“What is more interesting is to see possible new infrastructure measures to be announced in November, as suggested by Theresa May. Government spending stimulus will be the next step.”