Interest rate cut now on the cards as the pound takes another leg down

Interest rate CUT now on the cards, say analysts, as pound falls to two-year lows after shock data shows UK economy shrinking

  • Raising of rates ‘increasingly out of kilter with economic reality’ economist says
  • The pound has fallen to $1.208 versus the dollar and €1.077 against the euro
  • Pressure on Bank of England to join US and others by going into ‘easing mode’

City analysts are starting to see an interest rate cut as the likeliest next move by the Bank of England rather than a rise as was believed to be in the offing only months ago.

The shift in sentiment has been triggered by today’s surprisingly poor reading for the UK economy.

Britain’s gross domestic product fell by 0.2 per cent in the second quarter of the year, the first quarterly fall that has been registered since 2012.

Governor of the Bank of England Mark Carney could be announcing a rate cut at his next press conference

The pound reacted to the news accordingly, putting in a 0.4 per cent fall versus the dollar and 0.7 per cent drop against the euro to sit at $1.208 and €1.077 respectively – both two-year lows. 

The last time the pound was that weak against the euro was in August 2017 when it fell to €1.0743. 

Shares were virtually unmoved though, with the FTSE 100 flat for the session at 7,280 as of midday.

Rates are sitting at 0.75 per cent with Mark Carney and his colleagues holding steady at the last meeting and it now seems unlikely we will see a full percentage point any time soon. 

Ken Wattret, chief european economist at IHS Markit, noted: ‘The Bank of England’s reiteration at the start of August that an “ongoing tightening of monetary policy would be required” is increasingly out of kilter with economic reality.’    

‘Even if the UK pulls back from the “no deal” cliff-edge, which is far from guaranteed, Brexit-related uncertainty will continue to weigh heavily on the economy,’ he added. 

‘Moreover, beyond the UK’s borders, the clouds are also darkening, pushing central banks across the globe into easing mode.’ 

‘Absent a dramatic turn of events, the pressure will continue to build on the Bank of England to join them,’ Wattret continued. 

Sterling has taken a plunge against both the dollar and the euro today

Sterling has taken a plunge against both the dollar and the euro today 

‘The Bank of England may take the view that soft sterling is doing the easing for them.

‘But we know from the post-referendum slump that the damage to household real incomes from the inflationary boost can also choke off consumer spending growth.’

Nancy Curtin, chief investment officer at Close Brothers Asset Management added: ‘There’s no denying that the UK’s GDP figures are a cause for concern. However, the jury’s still out on the extent of inventory built-up.’ 

‘We are likely to see a similar phenomenon ahead of October, as firms look to mitigate supply chain disruption in the case of a no-deal Brexit, which may provide short-term support for GDP.’ 

‘The MPC has already warned on Britain’s growth forecasts, and a rate cut this side of Christmas is looking ever more likely under in a ‘no deal’ Brexit scenario. 

‘On the bright side, the Prime Minister’s plans for ‘boosterism’ – government spending to support the UK economy – could serve as a counterbalance to recent stagnation.’ 

‘The Bank of England is in cloud cuckoo land if it still thinks it’s going to hike rates next,’ analyst Neil Wilson chimed in.

‘For sure the next move is down – just look at what’s happening with global bond yields and central banks racing to cut. 

‘Never mind the Brexit risks, the economy is suffering and the Bank is going to be forced into cutting. I would say though that it’s not all that bad – yet – and so it would be likely to keep its power dry until November.’