Bank of England interest rate

Bank of England interest

Dr Martin Weale’s comments resulted in a sharp fall in the value of the pound. Photograph: LNP/Rex/Shutterstock

The prospect of a UK interest rate cut next week was virtually confirmed on Tuesday after a key member of the Bank of England’s policymaking committee warned the economy was in a worse state than he expected just a week ago.

In a sudden U-turn from his previous stance, Dr Martin Weale, one of the more hawkish members of the Bank’s monetary policy committee, suggested in an interview with the Financial Times (£) that he was likely to vote for further stimulus measures. On 18 July, Weale said in a speech there was not enough evidence that the economy was suffering from the UK’s vote to leave the European Union.

Weale’s change of heart followed Friday’s poor UK services and manufacturing PMI survey, showing firms suffering falling orders and demand in July. The survey suggested the UK economy was on course to shrink by 0.4% in the third quarter unless conditions improved, according to the report’s compliers, Markit.

Weale said that last Friday’s PMIs were “a lot worse than I had thought” and showed “expectations have worsened sharply”. He added: “They are the best short-term indicator we have at the moment. I certainly feel they are very material for the decision we’ll be taking next week.

“I see things rather differently from what I would have done had we not had those numbers and the material point is that they were collected after 12 July, so after the initial shock of the referendum.

“What I said last week is that I would like more information as well as more reflection and I have had more information. Although you can’t say there’s a clear signal, if you spend all the time waiting for a clear signal, it never comes.”

Weale’s comments sent the pound sharply down to a two-week low of $1.3060 although it later recovered some ground to trade at $1.3127, down 0.1% on the day.

In light of the slowdown in the economy, a majority of analysts polled by Reuters had already expected a rate cut and some believe the Bank could restart its £375bn quantitative easing or bond buying programme.

Mike Cherry, the FSB’s national chairman, said: “The warning from NatWest and RBS will be deeply concerning to small firms. FSB’s latest research shows small business confidence is already at a four-year low. Firms are less optimistic, cutting headcount and curbing investment intentions.

“When the monetary policy committee meets next week to decide on interest rates, we would call on them to do everything possible to consider the implications of changing interest rates for smaller firms and the self-employed looking to maintain or grow their business.”

In his FT interview, Weale, who leaves the MPC after the August meeting, said monetary policy would not boost the economy immediately and may not prevent a recession.

Wednesday sees the first estimate for second quarter UK GDP, with analysts expecting a growth to remain at 0.4%, the same as in the first three months of the year

More signs of weakness in the economy came as mortgage approvals fell to 40, 103 in June, down from 41, 842 in May, according to the British Bankers Association.

Source: www.theguardian.com
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