Thursday 4 August 2016 7:30 pm

As the Bank cuts interest rates and restarts bond purchases, will it succeed in stimulating the economy?

Dean Turner is UK economist at UBS Wealth Management.
and Andrew Sentance
Andrew Sentance is senior economic adviser to PwC and a former member of the Bank of England’s Monetary Policy Committee.

Dean Turner, UK economist at UBS Wealth Management, says Yes.

With the threat of a sharp slowdown looming, the pre-emptive strike by the Bank of England with a comprehensive package of easing measures, should ease the pain. The measures were more than the markets were anticipating, as was the signal that the Bank stands ready to do more in the months ahead. If the economy deteriorates further, Mark Carney hinted that the Bank has options. Further cuts and additional quantitative easing are still on the table. However, the governor was also keen to emphasise that he doesn’t expect to see negative interest rates on his watch. Many will be questioning how effective this package will be, as it is clear that there are limits to what monetary policy can achieve. We share the Bank’s confidence that these measures will, at the margin, support businesses and households. However, if the worst of the slowdown is to be avoided, this will have to be complemented by a meaningful fiscal response, as signalled by the chancellor.

Andrew Sentance, senior economic adviser to PwC and a former Monetary Policy Committee member, says No.

There are three reasons why the Bank’s actions are likely to make little difference to the UK economic outlook. First, interest rates are already low and have been at rock bottom levels for over seven years. A further quarter point cut will make little difference to borrowing and savings rates and its stimulus impact is likely to be negligible. Second, there will be offsetting effects which will dampen economic growth in the short term at least. A weaker pound pushes up business costs and inflation, squeezing disposable income and spending power. The cut in interest rates will also hit bank lending margins, which makes the financial system less secure. Third, the economy has suffered a political and structural shock following the Brexit decision. Monetary policy is not the right instrument to offset this shock. We need stronger direction on the post-Brexit plan from the government. This will not be clear until the autumn at the earliest. In the meantime, businesses need to be prepared to ride out the current period of uncertainty.

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