90% chance of a rate cut in August

Ryan Bembridge

July 25, 2016

The Bank of England is 90% likely to cut base rates in August according to the financial markets.

The Capital Economics UK Economics Update said the economy has retained its composure after the vote to leave the European Union but only because the Bank is expected to deliver a stimulus package at its August 4 meeting, which is likely to include a rate cut.

The markets widely expected the Bank to cut base rates last month which turned out to be a false alarm as they were held at 0.50%.

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The research consultancy wrote: “Markets’ implied probability of a rate cut in August, which had dipped following their decision to keep rates on hold in July, has risen again this week and stands close to 90%.

“The minutes of the MPC’s July meeting also suggested that the committee is considering a broader package of measures, which could include a re-starting of the Bank’s quantitative easing programme.”

New Chancellor Phillip Hammond hinted at fiscal policy being “reset” at the Autumn statement last week.

Capital Economics added: “Almost a month on from the historic vote to leave the EU, some of the first indicators of the state of the economy appear to point to a marked slowdown in growth.

“But the prospect of policy support to come has helped financial markets to retain their composure.

“Prime Minister [Theresa] May made it clear… that, while she still aims to achieve a budget surplus in the long-term, the previous fiscal target of a surplus by 2019/20 has been abandoned, adding to the possibility that the previously-planned fiscal tightening could be scaled back over the course of the next few years.”

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