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Bank of England Cuts Interest Rates in Half
- 06 August 2016
Just six weeks after the Brexit referendum the Bank of England has announced a halving of interest rates from 0.5% down to 0.25%. This announcement was made on Thursday August 4th following further confirmation of poor economic performance in the service, manufacturing and construction sectors. The news of these cuts brought with it a reactionary drop in the pound back to £0.85 against the euro.
Chris Williamson, Markit’s chief economist said that the service sector data in combination with figures already available for the construction and manufacturing sectors pointed to a 0.4% shrink in the economy in the last 3 months. With these results it seemed inevitable that the Bank of England would have to drop interest rates to stimulate the economy and reduce the chances of the UK falling into a recession. The interest rate cut was combined with a stimulus package to ensure that the benefits will be effective. This cut comes to an economy that was already at record low interest rates since dropping to a base rate of 0.5% in the financial crisis of 2009.
Will this protect against a UK recession?
Whether this measure will be enough to protect the UK from a recession is still up for debate. Most economists are hedging their bets and judging a 50/50 chance that a recession will happen with the Bank of England estimating that the originally forecast growth of 2% will now be reduced to 0.1%, narrowly avoiding a recession to 2016 year end. Much of this is due to the current uncertainty in the UK economy as it prepares to negotiate it’s trading position with the Europe Union. Further measures to limit the risks to the UK economy are expected but the form that these measures will take is still unclear.
While this uncertainty remains, lobby groups are rallying together to highlight concerns for their industry and ensure their interests are protected. Food and Drink Federation director has advised that their concerns and conversations with government officials this week has focused on negotiation over the withdrawal itself, negotiations over the free trade agreement and the legislative framework that would emerge from the withdrawal. Farming unions have also come together in an agreement to cooperate on concerns over the trade and investment climate in addition to major concerns over the access to seasonal trade to support the UK’s produce industry. According toThe Guardian 90% of all of British fruit, vegetable and salads are picked and graded by 60,000-70,000 overseas workers. If sufficient trade agreements are not made this will cause a real challenge for the 32% of retailers who are predicting to source more from the UK according to a study from Barclays.
This same study highlighted that 76% of retailers are looking closely at their supply chain to minimise risks of the leave vote. Interestingly while 56% of retailers believe that Brexit will have no real impact on their business 52% think that their business is unprepared for Brexit. This appears to further highlight uncertainty within the industry while we await PM Teresa May’s timetable for a withdrawal plan expected in late October.
Source: Bord Bia - Bank of England Cuts Interest Rates in Half
