The Bank of England could slash interest rates twice over the course of the next 12 months, economists at the Bank of America Merrill Lynch have predicted.
In a note published today the US multinational investment bank has said it expects Threadneedle Street to cut rates by 25 basis points in November this year and May 2020.
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“While this should not be a difficult call it feels difficult. Although the Bank of England has recently turned dovish we think they will resist cutting rates given how hard they argued for moving away from the effective lower bound,” Merrill Lynch said.
It added: “Inflation expectations in the UK may be slightly deanchored on the upside rather than the downside. And all future Prime Ministerial candidates are promising fiscal easing.
“We also think the Bank of England waits until after the 31 October Brexit deadline. It may be easier to factor in downside Brexit risks at that point, especially if growth has remained weak to that point.”
Merrill Lynch also said in today’s note that the growth outlook is worse than it had originally thought, as it forecasts 1.2 per cent GDP growth in 2019 and 0.9 per cent in 2020, with continued trade wars and a higher chance of a no-deal Brexit pushing down expectations.
The predictions come on the same day as one member of the Bank of England’s monetary policy committee (MPC) said interest rates could be cut to almost zero if Britain leaves the European Union without a deal.
Gertjan Vlieghe, a member of the rate-setting MPC, told an audience in London today that the central bank might have to slash rates to nearly zero in the event of a no-deal Brexit.
In a speech given at Thomson Reuters, Vlieghe said: “On balance I think it is more likely that I would move to cut Bank Rate towards the effective lower bound of close to zero per cent in the event of a no-deal scenario.”
Vlieghe, who was once a bond strategist at Deutsche Bank, said it was “highly uncertain when I would want to reverse these interest rate cuts”, as it would depend on the rate of recovery from a potential no-deal shock to the markets.