Europe News

Would Bank of England support sterling in a Brexit?

Bank of England holds rates
Bank of England holds rates

The Bank of England (BoE) voted 9-0 to keep the U.K. main interest rate at 0.5 percent — marking the seventh straight year of record-low interest rates.

The BoE's £375 billion ($539 billion) asset-purchasing program, designed to stimulate lending and economic growth, also remained untouched.

But with the economic outlook less rosy than six months' ago, and the likelihood of market volatility in the wake of the U.K. leaving the European Union (EU), the tides could be shifting towards further monetary easing.

Analysts say the BoE could opt to support sterling if the U.K. exited the EU. The currency has already declined by around 1.5 percent against the U.S. dollar after a poll on Tuesday put the outcome of the Brexit vote on June 23 on a knife's edge.

Simon Dawson | Bloomberg | Getty Images

"There appears to be increased uncertainty surrounding the forthcoming referendum on U.K. membership of the European Union," the BoE said Thursday in its release of the minutes of the Monetary Policy Committee meeting.

"That uncertainty is likely to have been a significant driver of the decline in sterling. It may also delay some spending decisions and depress growth of aggregate demand in the near term."

Prior to the announcement, Derek Halpenny, European head of markets research at Bank of Tokyo-Mitsubishi, said there seemed to be a "subtle shift" in rhetoric from some BoE policy-making members towards the potential need for extra easing.

"Further evidence of 'Brexit' uncertainty hitting confidence may bring out a vote for cutting — perhaps Gertjan Vlieghe or Andy Haldane are the likeliest candidates," he said in a note.

The Bank of England has a single mandate to deliver price stability, defined by the government's inflation target of 2 percent.

The Consumer Prices Index remains far below this, rising by 0.3 percent in the year to January and 0.2 percent in the year to December 2015.

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The Bank of England began cutting rates in July 2007 as the global financial crisis took hold. Rates have now remained at 0.5 percent since March 2009.

"What is clear is that any sudden external shock to economic activity would have to be largely dealt with by the BoE with little flexibility available fiscally," Halpenny said on Thursday. "'Brexit' is one obvious shock and that's likely to keep yields in the U.K. very well anchored in the coming months."

Economic forecast cut

The country's Office for Budget Responsibility also poured cold water on the prospect of an any upcoming rate hike, after it sliced its gross domestic product (GDP) forecast on Wednesday.

GDP growth is now seen at 2.0 percent in 2016, down from the 2.4 percent forecast in November. The economy is then seen expanding by 2.2 percent in both 2017 and 2018.

OBR cuts UK forecasts

"All members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles," according to the BoE minutes released Thursday.

"This guidance is an expectation, not a promise. The actual path Bank Rate will follow over the next few years will depend on the economic circumstances."

Central bank bonanza

The day was a busy one for central banks, with the Swiss National Bank and Norway's Norges Bank also issuing rate decisions.

The Norges Bank cut its key interest rate from 0.75 percent to 0.5 percent — an all-time low, as for the Bank of England — and warned again that negative rates were possible in the future.

The Swiss National Bank maintained expansionary monetary policy, with the interest on sight deposits at the bank unchanged at minus-0.75 percent.

Late on Wednesday, the U.S. Federal Reserve left its rates unchanged and said it now expected to make only two rate hikes this year, not four.

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Possible to go below zero: Norges Bank
Possible to go below zero: Norges Bank