Thursday preview: Bank of England expected to cut interest rates

The Bank of England is widely expected to cut interest rates by 25 basis points on Thursday to cushion the blow of the Brexit vote.

Following Britain's decision to leave the European Union on 24 June, Carney said the weakened UK economic outlook will likely require some “easing of monetary policy” over the summer.

Since Brexit, the pound has plunged, consumer confidence has weakened and business sentiment has fallen.

As a result, many economists are pricing in an interest rate cut with an 83% chance, according to overnight indexed swaps.

“To us, there seems little reason to wait on an interest rate cut front,” said Howard Archer, chief UK and European economist at IHS Global Insight, who expects rates will be lowered to 0.25% from 0.50% on Thursday.

“We have serious doubts that the Bank of England will take interest rates any lower than 0.25%, and we believe negative interest rates are highly unlikely.”

IHS expects the BoE will also revive quantitative easing and extend its Funding for Lending Scheme at the August policy meeting.

Bank of America Merrill Lynch also believes the BoE will cut rates by 25 basis points, saying the central bank has nothing to gain by waiting.

ML said it was looking for a 40 basis points cut, but sees a good change of only 25 basis points, noting that Carney has said he is concerned about taking rates “too low”. Still, BofA ML said it was hard to tell how low was “too low”.

“Rate setters have already recognised Brexit as a bad economic shock. Plenty of data confirm that view. Mark Carney said easing would probably be required. Even if no data were available, we believe the right action would be to cut: just in case.

“That is zerobound economics: the BoE can hike in the future if it is wrong, but making up for delaying is difficult: ask the ECB. We hear a lot that the BoE may ‘save its bullets’. We disagree. If one sees a waterfall downstream, better to start paddling now in case it is a big waterfall. By the time one gets to the edge it may be too late.”

ML also looks for £50bn additional quantitative easing in August, potentially including private-sector assets and a reboot of the funding for lending scheme.