Bank of England sticks
with rate cut signal despite Brexit bounce
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[September 15, 2016]
By William Schomberg and David Milliken
LONDON (Reuters) - The Bank of England said
on Thursday it was still likely to cut interest rates to just above zero
later this year, even though the initial Brexit hit to Britain's economy
was proving less severe than it expected only last month.
The Bank's nine rate-setters voted unanimously to keep Bank Rate at its
new record low of 0.25 percent, the lowest level in the BoE's 322-year
history.
They also voted 9-0 to keep the Bank's bond-buying program target at 435
billion pounds and to continue with its new plan to buy up to 10 billion
pounds' worth of corporate bonds.
Last month the BoE decided to help the economy cope with the shock of
the decision to leave the European Union with a stimulus package on a
scale not seen since the depths of the global financial crisis.
But since August, a string of indicators has shown a bounceback from the
initial impact of the vote, leading some lawmakers to criticize BoE
Governor Mark Carney for being alarmist about the risks of a Brexit
vote.
The central bank said the economy was still on course to slow sharply.
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"A number of indicators of near-term economic activity have been
somewhat stronger than expected," the Bank said in minutes of the
Monetary Policy Committee's September meeting. "The Committee now expect
less of a slowing in UK GDP growth in the second half of 2016."
Central bank staff now estimate the economy will grow by 0.3 percent in
the July-September period, better than their previous forecast of a slow
crawl of just 0.1 percent made in August.
Data published earlier on Thursday showed retail sales edged down only
slightly in August after the strongest July in 14 years. Retailer John
Lewis said the EU vote had had little impact but the full effect was not
yet clear.
A Reuters poll of economists showed on Thursday that Britain is likely
to narrowly avoid a recession.
The Bank said inflation would rise more slowly this year than it
previously thought.
But overall economic growth of 0.3 percent would represent a halving
from the second quarter's pace, and the Bank reiterated it could cut its
benchmark lending rate again soon if its longer-term view of the economy
remained unchanged at its next meeting in November.
OUTLOOK NOT CHANGED
"The Committee's view of the contours of the economic outlook following
the EU referendum had not changed," the minutes said.
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A sign is displayed outside the Bank of England in London, Britain
August 4, 2016. REUTERS/Neil Hall/File Photo
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If the November forecasts were "broadly consistent" with August's, "a majority
of members expected to support a further cut in Bank Rate to its effective lower
bound at one of the MPC's forthcoming meetings during the course of the year,"
they said, reiterating the MPC's message in August.
Two rate-setters who last month opposed the expansion of the government
bond-buying program said they still did not think it was needed but voted in
line with their colleagues because reversing the decision now would be too
disruptive.
Under a new MPC calendar, the Bank's next rate decision is scheduled to take
place on Nov. 3. That is when economists expect it to cut borrowing costs to
around 0.1 percent.
While the European Central Bank and the Bank of Japan have cut interest rates
below zero, BoE Governor Mark Carney has said he does not favor resorting to
negative rates in Britain as this could hurt the country's banking sector.
Instead, with the Bank running short of options, it may fall to finance minister
Philip Hammond to give the economy its next significant dose of stimulus. He has
said he will slow the country's push to turn its budget deficit into a surplus
and is expected to announce higher public spending in November.
The MPC continued to expect that the uncertainty caused by the vote would drag
on the economy as Britain and the EU haggle over the terms of their new
relationship, which will probably reduce access for British companies to the
bloc's single market.
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Surveys since August had shown companies were probably cutting back on business
investment but the housing market had proven slightly more robust than expected,
the minutes said.
(Editing by Hugh Lawson)
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