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Bank of England prepares to tackle Brexit hit

By Reuters | August 1st 2016
Members of the public walk past the Bank of England in central London

LONDON: The Bank of England (BoE) must decide over the coming week how much trouble Britain’s economy is in following the shock vote to leave the European Union, and how much firepower it can throw at the problem.

After the Bank of Japan (BoJ) on Friday disappointed expectations of a major new stimulus drive, the BoE could even add to the Brexit uncertainty in Britain if it simply shaves its already record-low interest rates, some economists say.

A Reuters poll of economists published on July 26 predicted the British central bank would cut its benchmark Bank Rate to 0.25 percent from 0.50 percent on Aug. 4, but most said it would not revive its massive bond-buying programme for now.

Adam Posen, a former BoE rate setter, urged the BoE to cut rates to zero - despite Governor Mark Carney’s concerns that such a move could hurt banks - and also send a clear signal that further bold action is on the way.

“It’s not clear that the Bank of England carefully calibrating its response and communicating the message that they are worried about an uptick in inflation would do anything to stabilise the situation,” Posen said. “It probably would be counterproductive.”

The bank might take interim measures to help the economy, such as more encouragement for bank lending, while it waits for clearer signs of the extent of the Brexit hit to the economy.

Until now, it has not had to contemplate the kind of radical decisions taken by the BoJ and the European Central Bank (ECB), both of which have cut interest rates below zero as they try to spark their economies into life.

Britain has been among the fastest-growing of rich economies for much of the last three years.

But the June 23 referendum decision to leave the EU has left it at risk of a recession in the short term and years of morale-draining uncertainty as the country tries to hammer out a new trade deal with the bloc.

signs of weakness

Carney said a week after the referendum that he thought the Bank would pump more stimulus into the economy over the summer. But the BoE then wrong-footed investors when it kept rates on hold in July, adding to pressure for action in August.

The BoE still has no official data to assess how hard Brexit has hit the economy although surveys, which are sometimes less reliable, have shown a sharp fall in consumer confidence and suggested a weakening of activity across significant areas of the economy.

One rate-setter, Kristin Forbes, has said the BoE should “keep calm and carry on” until there is a clearer picture. But fellow BoE rate-cut sceptic, Martin Weale, has sounded much more gloomy about outlook after the referendum.

Over the coming week, there are likely to be new signs of weakness in British manufacturing, construction and services in reports due out between Monday and Wednesday.

In the euro zone also, similar purchasing manager indexes are likely to show France’s economy in the doldrums, according to economists’ forecasts in a Reuters poll, adding to the case for more stimulus by the ECB, possibly as soon as September.

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