Time to cut the rates?

 

Bank Governor Mark Carney said in a speech last Thursday that Britain will find a way to make the new political and economical situation work. In his speech, the Bank of England Governor hinted, that the easiest way to do this might be a cut to interest rates.

On Thursday, when Carney gave his speech, the pound continued trading steadily against the dollar at approximately 1.33. This followed a drastic drop less than a week earlier, on Friday morning.

Governor Carney warned:

In recent years, policy uncertainty has increased globally.

All this uncertainty has contributed to a form of economic post traumatic stress disorder amongst households and businesses and in financial markets.

People have become more cautious about their futures and their more averse to making irreversible decision that may be exposed to some future disaster risk.”

Referring to the UK’s shift from belonging to the European Union to now forming its future more independently, Carney stated:

In the coming years, the UK will redefine its openness to movements of goods, services, people and capital and in tandem a potentially broad range of regulation.

Uncertainty over the pace, breadth and scale of these changes could weigh on our economic prospects for some time.

Whilst some of the necessary adjustments could prove difficult and may take time, the transition from the initial shock of restructuring and then the building of the UK economy will be much easier with sound policy frameworks.”

He then added:

At times of great uncertainty, households businesses and investors ask basic economic questions. Will inflation remain under control? Will the financial system do its job?”

After a short break for a rare laugh in the otherwise very focused speech, Carney continued:

The near term challenges in the UK economy cannot be wished away but they can be addressed. A clear plan is needed and its measure must be implemented with resolute determination.

The Bank has taken all necessary steps to prepare for these events and we will not hesitate to take any additional measures required to meet our responsibilities.”

When the referendum result came in one week ago, Carney didn’t hesitate to re-assure markets to not be too concerned. In a 7am statement prior to the market opening, he stated:

We are well prepared for this. The Treasury and the Bank of England have engaged in extensive contingency planning and the chancellor and I have been in close contact, including through the night and this morning.”

One week after the referendum, the markets rose again and headed higher towards the afternoon. Experts even made opinions vocal that the post-Brexit bounceback could be fuelled by expectations that the Bank of England will cut interest rates in August.

For the last seven years, the rates have been sitting at a stable 0.5%, however they might be slashed even further towards zero in an attempt to stabilise the economy.

Read the speech in full here http://www.bankofengland.co.uk/publications/Documents/speeches/2016/speech915.pdf.

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