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Brexit: How Bank of England could ramp up response

The Bank of England is expected to cut interest rates and could unveil a new round of stimulus on Thursday, while cutting its economic forecasts for the U.K. weeks after the epoch-making Brexit vote.

Most economists now forecast that the Bank's rate-setting committee will cut interest rates to a new historic low of 0.25 percent, its first action on the base rate in more than seven years, when it cut to the current rate of 0.5 percent.

After all, last month, the Bank said "most members of the committee expect monetary policy to be loosened in August."

The forward-looking signs for the U.K. economy are pointing towards a difficult period, with the economy shrinking at its fastest rate since the 2008-09 financial crisis, according to the closely watched Purchasing Managers' Index short-term survey by financial data company Markit, which was released on Wednesday.

Many are also now speculating that there could be a new bond-buying program to help stimulate the U.K. economy, after a series of data points suggested that the country had slowed around the time of the historic referendum on European Union membership, which delivered a vote to leave that surprised many.

Attention will also focus on its latest inflation report, which is likely to downgrade the outlook for the post-referendum U.K. Inflation forecasts are set to rise following the notable weakening in sterling.

Knee-jerk re-pricing in markets?

Mark Carney, the governor of the Bank of England, will need all his trademark caution to navigate the potentially stormy post-referendum waters.

"If the BoE does too little, say, just a rate cut, that would be insufficient to have any meaningful positive effect on demand and risks causing a knee-jerk re-pricing in financial markets. If the BoE does too much, it could spook households and markets into thinking the economy is in worse shape than it is. Coming out too hot could be worse than coming out too cold," Kallum Pickering, senior U.K. economist at Berenberg, wrote in a research note.

Carney was criticized by some on the leave side in the Brexit campaign for giving gloomy economic predictions about the U.K.'s future outside the European Union. He may use his flagship forward guidance policy tomorrow to indicate that the Bank could join its counterparts at the European Central Bank and Bank of Japan in negative interest rates.

'50-50 chance of recession'

The National Institute of Economic and Social Research, a U.K. think tank, called for a "sledgehammer" from policymakers on Wednesday, as it warned that there was a 50-50 chance of a U.K. recession in the next 18 months.

The current extraordinary monetary policies employed by central banks now seem set to continue, despite indications over the past year that they might start returning to more normal policy.

'"Global QE (quantitative easing)" will probably be as large in the coming twelve months as it has been at any time since the financial crisis," Andrew Kenningham, global economist at Capital Economics, wrote in a research note Wednesday.