The Bank of England said on Thursday it was still likely to cut interest rates to just above zero later this year, even though the initial Brexit hit to Britain’s economy was proving less severe than it had predicted only last month.
The BoE’s rate-setters voted unanimously to keep Bank Rate at 0.25 percent, the lowest level in the BoE’s 322-year history, after cutting it in August for the first time since 2009 to tackle the shock of Britain’s vote to leave the European Union.
Policymakers also voted 9-0 to keep their government bond-buying target at August’s new, higher level of 435 billion pounds ($574 billion) and to stick with a new plan to buy up to 10 billion pounds’ worth of corporate debt.
August’s stimulus was Britain’s largest since the global financial crisis. But since then a string of indicators have rebounded from July’s slump, leading some lawmakers to chide BoE Governor Mark Carney for being alarmist about the Brexit vote.
“A number of indicators of near-term economic activity have been somewhat stronger than expected,” the Bank said in minutes of the Monetary Policy Committee’s September meeting.
Central bank staff estimated the economy will grow by 0.3 percent in the July-September period, better than their previous forecast in August of a slowdown to 0.1 percent.
Data published earlier on Thursday showed retail sales edged down only slightly last month after the strongest July in 14 years. Retailer John Lewis said the EU vote had had little impact but the full effect was not yet clear.
A Reuters poll of economists showed that Britain is likely to narrowly avoid a recession, in contrast to forecasts a month ago that the economy was poised to contract.
The Bank also said inflation would rise more slowly this year than it previously thought.
But overall economic growth of 0.3 percent would still be half the second quarter’s pace, and the Bank said it was hard to say what the better-than-expected performance in recent weeks meant over the longer-term.
“The Committee’s view of the contours of the economic outlook following the EU referendum had not changed,” the minutes said.
If the November forecasts were “broadly consistent” with August’s, “a majority of members expected to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year,” they said, reiterating the message of August.
HIGH BAR FOR BOE
Sam Hill, an economist at RBC Capital Markets, said he was sticking to his forecast of a rate cut to just 0.1 percent in November, although financial markets might react sensitively to any data in the coming weeks that they think could prompt a BoE rethink.
“We still think the MPC will set a reasonably high bar for being convinced its ‘contours’ for the outlook have improved materially from the August projections,” Hill said.
Allan Monks at JP Morgan said that while he still expected a rate cut in November, it was less certain now. “Near growth could turn out better still, and this could in turn influence views of the magnitude of the softness expected in 2017,” he said.
Two BoE rate-setters who last month opposed the expansion of the government bond-buying program said they still did not think it was needed, but voted in line with their colleagues because reversing the decision now would be too disruptive.
Under a new MPC calendar, the Bank’s next rate decision is scheduled to take place on Nov. 3.
Unlike the European Central Bank and the Bank of Japan which have cut interest rates below zero, BoE Governor Mark Carney has said he does not favor resorting to negative rates in Britain for fear of damaging the country’s big banking sector.
Instead, with the BoE running short of options, it may fall to finance minister Philip Hammond to give the economy its next big dose of stimulus. He says he will slow the push to turn Britain’s budget deficit into a surplus and may announce higher public spending in a budget statement on Nov. 23.