There is a 98 per cent chance the Bank of England will cut interest rates

 
Jake Cordell
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Mark Carney will update the world as to the health of the UK economy, as seen through the eyes of Threadneedle Street
Mark Carney will update the world as to the health of the UK economy, as seen through the eyes of Threadneedle Street (Source: Getty)

The Bank of England is almost certain to slash interest rates when its rate-setting monetary policy committee (MPC) meets for the second time since the EU referendum this week.

Futures markets indicate there is a 98.1 per cent probability the MPC will cut rates to a new record-low of 0.25 per cent, slightly up on the 94 per cent chance last week after disappointing purchasing managers' index (PMI) data out this morning.

Commentators also suggested the Bank may look to provide a double-bout of stimulus by extending its quantitative easing programme at the same time as cutting interest rates.

The pound weakened following the PMI data and as the Bank of England meeting came into focus at the start of what is typically the quietest trading month of the year.

Sterling was down 0.3 per cent against the dollar at $1.3189 this lunchtime and worth 0.2 per cent less against the euro at €1.1822.

Despite the near-certainty, markets had also expected Threadneedle Street to act back in July, but it confounded expectations by keeping interest rates on hold. Three members of the MPC have already indicated they will vote for a cut to interest rates this time, after only one, Gertjan Vlieghe, broke from the pack last month.

If the Bank decides to cut rates it will set a new low in its 322-year history. The base rate has been stuck at 0.5 per cent since March 2009 and had previously been considered the lowest they could technically go in the UK. Governor Mark Carney has said he is weary of what lower rates do to banks' profit margins and the implications for financial stability. It is possible he could accompany an interest rate cut with a new round of cheap loans, such as an extension of the funding for lending scheme to encourage banks to keep their doors open.

Joshua Mahony, market analyst at IG, said: "The base case scenario is for further easing this week. With the UK now only 50 basis points above zero and a governor who has publicly denounced negative rates, it seems a matter of time before the quantitative easing bazooka comes out once more."

David Stubbs, global market strategist at JP Morgan, however, said the Bank may hold back on quantitative easing to keep some of its powder dry until it knows more about the extent of the EU referendum fallout.

Read more: Even City A.M.'s Shadow MPC wants a rate cut

"Determining how far to go is a tough decision for the committee," he said.

"On one hand, with the economic shock clearly unfolding, and policy taking a while to have its full impact, they may choose to be aggressive ... However, it is likely that the survey evidence we have so far overstates the actual hit to the economy, and so a cautious approach with a 25 basis point cut, plus plenty of language about being vigilant over economic risks, is also a perfectly defensible path to take."

The Bank of England's market-moving Inflation Report will also be published on Thursday. It will provide the most comprehensive and influential assessment of how the UK economy is likely to fare in terms of growth, prices, wages and employment over the next few years.

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