Pound plunges after Bank of England's dovish rates signal

Has an interest rate cut been 'virtually confirmed'?

27 July

An about-face by one of the more hawkish members of the Bank of England's rate-setting Monetary Policy Committee has convinced many the base interest rate will be cut next week.

In an interview with the Financial Times, Martin Weale said he had shifted his stance in response to starkly negative surveys on the UK economy in the wake of the Brexit vote.

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As recently as last week, Weale, an external rate-setter whose time on the panel comes to an end after next month's meeting, had said the committee needed to wait "for firmer evidence" before engaging in further stimulus.

Since then, official data has shown that while UK unemployment hit a new low in the run up to the EU referendum, wage growth continues to disappoint. Added to that, the first survey of business leaders since the 23 June vote showed the fastest slowdown in sentiment since the financial crash.

In fact, if the Markit Purchasing Manager's Index figures translate into actual activity and continue through the next two months, the third quarter would see negative growth of 0.4 per cent.

"What I said last week is that I would like more information as well as more reflection and I have had more information," Weale said. "Although you can’t say there’s a clear signal, if you spend all the time waiting for a clear signal, it never comes."

Bank of England governor Mark Carney has also made comments since the referendum that many have interpreted as being supportive of monetary policy action, while his chief economist Andy Haldane has signalled he too is minded to vote for stimulus next week.

The Guardian says the addition of Weale to these dovish ranks means the "prospect of a UK interest rate cut next week was virtually confirmed".

But his comments might not mean a rates cut, which could lead to even cheaper mortgage offers and pile further pressure on already low savings account interest rates.

Weale said the weak surveys were "material" to next week's decisions, but also highlighted the lag effect of monetary policy and suggested a ramping-up of the bond-buying quantitative easing programme to boost liquidity was likely to be most effective.

This chimes with the view of economist Duncan Weldon from the Resolution Group think-tank, who said the minutes of the Bank's July meeting showed it was more minded to extend QE than cut rates.

RBS fires warning shot to Bank of England over negative interest rates

26 July

Royal Bank of Scotland has issued a warning that a move by the Bank of England to cut the base interest rate below zero could have severe implications for its business and commercial customers.

In a letter that a spokesman confirmed to the BBC was sent to the 1.3 million business customers of RBS and its subsidiary NatWest, the state-backed group indicated it may be forced to pass on negative interest rates to its corporate clients.

In practice, this would mean charging interest on cash balances left with the bank. Personal banking customers would be unaffected.

The Bank of England's Monetary Policy Committee (MPC) is widely expected to unveil more stimulus measures next week to boost the economy in the wake of the Brexit vote, including a possible cut to already record-low interest rates.

This would most likely mean a 0.25 per cent cut from the current 0.5 per cent rate, but a move to zero or even lower has not been ruled out.

Mike Cherry, the chairman of the Federation of Small Businesses, said: "It is now vital that all finance providers holding deposits from small businesses… update customers concerned about any changes to their business current account during this uncertain economic period."

He appealed directly to the MPC to "do everything possible to consider the implications of changing interest rates for smaller firms and the self-employed".

This call not to change the status quo perhaps points to the real reason for RBS's intervention, said one expert.

Mike Amey, a managing director at the investment firm Pimco, said the two banks were "giving themselves wiggle room", but that the letter could also be "a bit of a reminder to the Bank of England there are negative consequences" to negative rates.

If rates go below zero, it means the central bank will charge lenders for their cash deposits, in theory encouraging them to issue more loans and boost the economy in the process.

However, the move could backfire if costs are merely passed on to become an expense for businesses.

Bank of England governor Mark Carney has previously indicated he was aware of the problems of negative rates, not least their power to squeeze bank profit margins. According to the Financial Times, he told MPs in April the MPC had not shown it had the "appetite" for such a dramatic move.

RBS attempted to reassure customers today after the letter made headlines.

A spokesman said: "We will consider any necessary action in the event of the Bank of England base rate falling below zero but… have no current plans to pass negative rates through to personal or business customers."

Bank of England may keep interest rates on hold

21 July

An early interest rate cut to a record low designed to boost the economy in the wake of Brexit is not needed, according to one of the Bank of England's leading monetary policy makers.

Kristin Forbes, an economist who has been an external member of the Monetary Policy Committee (MPC) that sets the base interest rate since 2014, writes in an article in the Daily Telegraph that "'keep calm and carry on' is a good motto to live by" for rate setters.

"This is not 2008. Then markets were collapsing, the financial system stopped functioning and the global economy was entering a recession," she says. "This is not a Lehman moment".

Her comments come in the wake of the shock decision by the MPC to hold rates at a record low of 0.5 per cent at its July meeting last week, despite apparent hints from Bank of England governor and committee chairman Mark Carney that borrowing costs would be slashed.

In its statement the MPC did, however, say it was "certain" that monetary policy would be loosened in August if conditions do not improve.

Forbes acknowledges the case for "pre-emptively" cutting rates as "insurance in case things are worse than expected". She also highlights the compelling arguments for a slowdown in the UK economy in the months ahead.

She points out that leaving the EU means an "intimidating renegotiation of numerous trade agreements", businesses potentially delaying investment or hiring amid "uncertainty", and growth rates most likely falling from their "solid" pre-referendum levels.

But she adds that these developments will "occur slowly – and their magnitudes will depend on what new agreements are negotiated".

While there is little "hard data" on how the economy is reacting now, a recent survey of Bank of England agents suggests that most businesses are still investing. Early indicators show that consumer spending, which makes up 60 per cent of economic activity, is holding up well too.

Set against this positive picture are the potential "costs" to the UK economy of cutting rates and this should give policy makers pause for thought, says Forbes. These include declining savings rates that could filter through to spending, squeezed bank profit margins that could undermine lending and longer-term inflation.

"In my view, we can wait to use these tools until we better understand the effects of the referendum, the optimal magnitude of any stimulus, and how best to target these tools to be most effective," she says.

Why interest rates might be cut in August and what it means for you

15 July

The Bank of England may have backed away from cutting interest rates this month, but its statement policy "loosening" is almost certain in August if the economy does not pick up is fuelling expectations the base rate will be chopped from 0.5 per cent to a new record low of 0.25 per cent.

Here’s why, and what it means for you.

Why could rates be cut?

In short, Brexit. “Last month’s referendum result has clouded the outlook for the British economy. That uncertainty is thought to be putting off investment, as firms and households are not sure exactly how the economy could be affected,” says Peter Spence in The Telegraph.

If everyone stops spending due to fears about the future it could see the country fall into recession. A rate cut would encourage the country – both big businesses and individuals - to spend their money rather than leave it in the bank.

What’s the argument against cutting rates?

The Monetary Policy Committee resisted the desire to cut and kept rates at 0.5 per cent this month, despite apparant hints to the contrary from Mark Carney in recent weeks.

The reason given is that rate setters want to wait and see how the economy performs over the “coming weeks as the fog of the recent Brexit vote turmoil began to clear,” says Philip Inman in The Guardian.

Another reason for caution is fears over inflation. “By increasing the supply of money... the Bank would also increase prices, or inflation,” says Spence. Sterling has already tumbled against other currencies, which will make imports more expensive - and prices too.

So, the MPC has to weigh up the risk of inflation against the potential for recession.

Cutting interest rates isn’t the only way the Bank of England can stimulate the economy and many now believe they may try quantitative easing or another cheap bank funding programme instead.

What would a rate cut mean for you?

Many economists are still predicting that interest rates will have fallen by the end of the year. If rates do fall it will have a mixed bag of effects on your purse.

“People who have ‘tracker’ mortgages – where the interest rate automatically goes up and down with the Bank rate – will benefit,” says Ben Chu in the Independent. “Someone with a 25-year £250,000 repayment tracker mortgage paying two per cent interest would see their monthly £1,100 repayment fall by around £30 if rates went down by 0.25 per cent.”

But, sales of tracker rate mortgages have fallen in recent years and those people on record-low fixed rates will only benefit if interest rates are still low when it is time for them to shop for a new deal.

What about savers?

Interest rates on savings accounts have been pitiful for a long time now and an interest rate cut won’t help things. A rate cut “may be passed on to savers, meaning further pain. But with interest rates already so low banks may hesitate to pass the cut to savers and choose to absorb the hit themselves,” says Chu.

Will it affect my pension?

If rates are cut it could have a knock-on affect on pensions. “A cut in base rate reduces returns on cash and encourages some investors to switch money to bonds or shares, driving their prices higher and cutting yields,” says Spence. “Those whose pension funds are invested in shares and bonds may therefore benefit.”

But, if you are a pensioner about to buy an annuity a rate cut could be catastrophic. Annuity rates are largely set based on the yield on 15-year government bonds, or gilts, as that is what the insurance companies offering the annuities tend to invest the cash in.

A rate cut could cause gilt yields to fall, meaning the annuity income you could buy would also fall. Given annuity rates are already low this could be really bad news for pensioners.

Bank of England shocks markets with 'bold' hold

14 July

Mark Carney and his fellow rate-setters on the monetary policy committee (MPC) have shocked markets with their "bold" non-action on interest rates.

After the Bank of England governor said that further stimulus would be required "this summer" and there is "value to making judgments as quickly as possible", analysts widely expected the base interest rate to be cut from 0.5 to 0.25 per cent today.

Yesterday, a "shadow MPC" for The Times said it would vote for a rates cut, but only "reluctantly" and that Carney's guidance had "forced" the decision.

In the event, the real MPC voted overwhelmingly by eight members to one not to increase rates. Instead it will review conditions in the economy in the coming weeks. Most members "expect monetary policy to be loosened in August” if there is no improvement, reports The Guardian.

Even this may not mean a rates cut, says Duncan Weldon, of the Resolution Group think-tank. He says the minutes accompanying the decision refer instead to other policy tools to boost liquidity.

Markets had effectively priced in a rates cut over the past day or so, with the FTSE up in excess of one per cent this morning and the pound down against the dollar.

In the wake of the vote, sterling has surged 1.7 per cent and is closing in on $1.34 against the dollar. The Daily Telegraph reckons it could go on to record its best week in seven years if its pick-up continues tomorrow.

The FTSE 100 has swung wildly following the bank's decision, tumbling initially into negative territory before recovering to a gain of 0.4 per cent as traders welcomed the lack of panic inherent in the decision to hold rates.

Giles Wilkes of the Financial Times writes: "Perhaps this is all wait-and-see, combined with a certain squeamishness around instigating a dramatic change in monetary stance on the day of a cabinet reshuffle. Perhaps they intend to act once more survey data are in, perhaps in August.

"And perhaps they are right but at times when the macroeconomy is difficult to gauge, but possibly changing fast, doing nothing is for once a remarkably bold move."