British slide into recession to force BoE's hand next month: Reuters Poll

[July 20, 2016]  By Jonathan Cable

LONDON (Reuters) - Britain's economy will slide back into recession in the coming year, forcing the Bank of England next month to cut interest rates and start purchasing bonds again to support growth, according to a Reuters poll of economists.

Britain's June 23 vote to quit the European Union sent shockwaves through global financial markets and economists participating in the Reuters poll taken in the past week slashed growth forecasts across the board.

In several Reuters polls taken before the vote, economists were united in saying Brexit would hurt the economy and in Wednesday's poll they gave a median 60 percent likelihood of a recession in the coming year.

"There is a good chance that we will see two consecutive quarters of negative growth," said Peter Dixon at Commerzbank. "That said, any recession is likely to be very shallow."

In the latest survey, the 2017 growth forecast was hacked to just 0.6 percent from the 2.1 percent predicted in a pre-referendum poll. The economy is expected to flatline this quarter and contract 0.1 percent next.

The 2016 forecast was chopped to 1.4 from 1.9 percent. On Tuesday, the International Monetary Fund cuts its 2016 and 2017 forecasts to 1.7 and 1.3 percent respectively, citing uncertainty over Britain's looming exit from the EU.

Pessimism among British households about their financial prospects hit a two-and-a-half-year high after last month's vote, a Markit index showed, while a Deloitte survey of CFOs at the biggest companies showed they are beset by doubts about the future and have slashed investment plans.

So to stimulate the economy and boost confidence, the BoE needs to act "promptly as well as muscularly", Andy Haldane, its chief economist said a day after the central bank upset markets by not cutting rates at its last meeting on July 15.

Only one policymaker, Gertjan Vlieghe, voted to cut rates this month, but most others said looser policy was likely to be needed at August's meeting.

"Having disappointed the markets once, the Committee may now have to work harder than otherwise to sustain the sanguine response to the Brexit vote. Another disappointment could be costly," said Jonathan Loynes at Capital Economics.

British finance minister Philip Hammond, only a week in the job, said on Tuesday the Bank would take the first steps to help steer the economy through its Brexit shock, and possible budget measures would not come until later this year.

Bank Rate was cut to an historic low of 0.5 percent over seven years ago and all but a handful of economists polled said the Monetary Policy Committee would chop another 25 basis points when it meets on August 4 in an effort to bolster the economy.

A woman holds a Union Flag shopping bag in London, Britain April 23, 2016. REUTERS/Kevin Coombs/File Photo

Some expected it to be cut to zero while a few said the Bank would hold steady. Bank Rate will then sit at 0.25 percent until at least the end of 2018 whereas the June 8 poll prediction was for it to have reached 1.5 percent by then.

A firm majority also said the MPC would revive the quantitative easing program that was wound down in 2012, most likely also in August. The median suggested 80 billion pounds would be added to the 375 billion previously spent.

Such moves would be negative for sterling - the currency has already lost around 10 percent against the dollar in the weeks since the referendum, as predicted by a Reuters poll before the vote - and will stoke inflation.

For the first time in several years, inflation is likely to rise above the 2.0 percent target within the forecast horizon.

At just 0.5 percent in June inflation will hit target early next year and then rise to 2.3 percent the quarter after, largely a result of imported inflation on account of the fall in sterling since the Brexit vote.

But that is unlikely to trigger talk of rate rises.

"The MPC will choose to look through the overshoot in CPI from the UK's decision to leave the EU. It will instead lean against elevated uncertainty and financial market volatility with further monetary policy easing," Barclays economists wrote in a note to clients.

(For a PDF of the poll results [BOE/PDF])

(For a factbox on the BoE's toolbox:)

(For other stories from the Reuters global economic polls:)

(Polling by Kailash Bathija and Purnita Deb; Editing by Raissa Kasolowsky)

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