Sterling hit by rate cut fears
THE pound fell yesterday after a warning that the Bank of England may need to cut interest rates even if Britain avoids a no-deal Brexit to revive an economy suffering “a slow puncture” from political uncertainty.
Michael Saunders, a former Citigroup economist and a regular campaigner for interest rate rises on the Bank’s monetary policy committee, said the UK economy had weakened “markedly” in recent quarters.
Uncertainty among businesses mostly reflecting fears of poor Brexit outcomes had become “more persistent and entrenched”. Addressing businesses in Yorkshire, Saunders said: “The economy could follow very different paths depending on Brexit developments.
“But in my view, even assuming that the UK avoids a no-deal Brexit, persistently high Brexit uncertainties seem likely to depress UK growth below potential for some time, especially if global growth remains disappointing.
“In such a scenario, it probably will be appropriate to maintain an expansionary monetary policy stance and perhaps to loosen further. The economy has not crashed. but the effect of Brexit uncertainties is perhaps akin to the economy developing a slow puncture such that growth has slowed to a mere crawl.” Sterling fell by 0.3 per cent against the euro to 89p and by 0.15 per cent against the US dollar.
Britain’s economy shrank for the first time in nearly seven years in the second quarter, with output down 0.2 per cent, raising fears it could tip into recession with another three-month contraction. Rates have remained at or near historic lows since the financial crisis over a decade ago. The Bank has hiked by a quarter-point twice, in November 2017 and August 2018, to 0.75 per cent.
It has said it may need to increase rates further to keep inflation low, but any rises would likely happen “at a gradual pace and to a limited extent”. Analysts pointed to views of MPC members, including chief economist Andrew Haldane’s caution towards loosening barring a sharp slowdown. Relatively rapid pay growth and wellanchored inflation expectations could deter moves for a cut.