Shares rise after hint that interest rates could be cut soon
INTEREST rates could be cut this month as the economy suffers ‘post-traumatic stress disorder’, the Governor of the Bank of England said last night.
Mark Carney claimed the outlook has ‘deteriorated’ since the vote to leave the European Union last week – but insisted the central bank has the ‘firepower’ to respond.
The Canadian said action ‘will likely be required over the summer’, raising the prospect of another cut in interest rates to kick-start growth.
His dramatic intervention sent shares around the world soaring, with the FTSE 100 index closing up 2.27 per cent at 6504.33, its highest level since August last year. The blue-chip index has gained nearly 9 per cent in only three days since its post-referendum low, adding £135billion to the value of Britain’s leading companies.
Another rate cut would be a major boost for borrowers as banks and building societies pass it on in the form of cheaper mortgages. But it would be a blow to savers who have suffered from years of dismal returns on their nest eggs since the financial crisis.
Rates have been frozen at a record low of 0.5 per cent since March 2009 and until recently Mr Carney has been saying the next move was likely to be a rise. But the prospect of a cut to 0.25 per cent – possibly as soon as July 14, when the ratesetting committee announces the decision of its next meeting – pushed the pound lower against the dollar and the euro.
It is thought rates could even reach zero before Christmas.
Mr Carney had faced a barrage of criticism from Leave campaigners over his warnings about the economic dangers of Brexit.
He stuck to his guns yesterday, although he did not repeat his earlier statement that a vote to leave could lead to a ‘technical recession’ where the economy shrinks for two quarters in a row.
He conceded that the referendum campaign had raised questions over his future as Governor but said it would be ‘irresponsible of me, or any of my other colleagues, to walk away’ from the job.
In a speech at the Bank’s HQ in the City of London yesterday, Mr Carney said the global uncertainty of recent years ‘has contributed to a form of economic post-traumatic stress disorder among households and businesses as well as in financial markets’. He said that even before last week’s referendum there had been a pick-up in uncertainty that was holding back the economy.
‘It now seems plausible that uncertainty could remain elevated for some time, with a more persistent drag on activ-
‘The UK can handle change’
ity than we had previously projected,’ he said. ‘The economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.’
That could take the form of a cut in interest rates or a fresh round of quantitative easing, or money printing. The Bank has already pumped £375billion of emergency funds into the economy through QE but has not added to the programme for four years.
‘I can assure you that in the coming months the Bank can expected to take whatever action is needed,’ Mr Carney said. ‘The Bank has identified the clouds on the horizon and can see that the wind has now changed direction.’
Promising to pursue a policy of ‘ruthless truth telling’, he warned ‘there are limits to what the Bank can do’ to cushion the impact of Brexit. He warned that cutting interest rates or printing more money ‘cannot immediately or fully offset the economic implications of a large, negative shock’.
Mr Carney added: ‘The result of the referendum is clear. Its full implications for the economy are not. The UK can handle change. The question is not whether the UK will adjust but rather how quickly and how well.’
He said the UK banking system is far stronger than it was before the financial crisis and can withstand shocks ‘far more severe than the country currently faces’.
His comments were welcomed by analysts. Ranko Berich of currency firm Monex Europe said: ‘Mark Carney did an admirable job of communicating that the Bank of England is one institution with a post-Brexit plan.’
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