Investment Clock insights

Carney signals Summer rate cut


Ian Kernohan

1 July 2016

It will take some weeks to assess any Brexit impact on the UK economy.  Today’s manufacturing Purchasing Manager's Index survey was a little stronger, although it was taken before the result of the referendum was known.  This sector ought to be a major beneficiary of lower sterling, even allowing for the fact that much of UK manufacturing these days is less price sensitive.  Mark Carney has said that the Monetary Policy Committee (MPC) will give an "initial assessment" of the economic situation at its July meeting, and then discuss the situation further in the run-up to its August Inflation Report. 

With the Bank of England’s regional agents already fanning out across the country to assess the impact of Brexit, it could well be that this evidence will be sufficient to prompt a rate cut in July, without waiting for the full set of July survey data to be available in August.  The magnitude of interest rate reduction is a moot point, since if rates are cut too far, there will be a knock-on impact on bank profitability, which would result in policy tightening.  We suspect the effective floor on rates will be 0-0.25%, with an initial cut in the Bank Rate to 0.25% coming over the next couple of months.

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.