Investment Clock insights

BoE pessimistic on outlook for UK economy, rates could fall further


Ian Kernohan

4 August 2016

There is very limited evidence to date about the impact of the ‘Brexit’ vote on the UK economy, however, by acting now the Bank of England (BoE) have signalled that they had best err on the side of caution, rather than wait for a fuller set of data in the autumn. The Purchasing Managers Index (PMI) surveys alone signal a sharp turn downwards in economic momentum, and we believe this must have had a significant impact on the unanimous decision from the BoE to cut rates. 

While we believe headline inflation will rise later this year and next, thanks in part to the impact of a lower pound, the starting point will be an inflation rate which is far below target.  Wage growth also remains muted, despite the recent fall in unemployment, so domestic inflation pressures look relatively tame.  

The Monetary Policy Committee (MPC) have always been reluctant to move to zero or negative rates because of the negative impact on some lenders who have an effective floor on their deposit rates, however with the introduction of the new Term Funding Scheme, there is some room to cut rates further to the effective Zero Lower Bound (ZLB).

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.