Bank of England says UK economy already showing signs of strain and highlights broader picture of ‘economic post-traumatic stress disorder’

The Bank of England has laid the ground for interest rate cuts following the Brexit vote, as its governorsaid the UK economy is already showing signs of strain.

The pound tumbled and shares soared on Mark Carney’s hints that official borrowing costs could be cut further from their record low of 0.5%, perhaps as soon as July.

The Bank’s governor used a speech a week after Britain voted to leave the EU to reassure business leaders and investors that the Bank’s contingency plans were “working well” and that it was considering more measures to safeguard financial stability. The economic outlook for the UK has “deteriorated”, Carney said, as a backdrop of uncertainty takes its toll.

Sterling fell by more than 1% against the euro and dollar on the speech, reflecting an expectation of lower interest rates, softer economic growth and higher inflation, and in late trading, the pound was worth €1.19 and $1.32. The FTSE 100 closed at its highest level so far this year, up by 2.3% at 6,504.33, as investors hoped that looser borrowing costs would improve business and consumer confidence.

The prospect of official interest rates possibly going as low as zero also knocked the yields on UK government bonds, or gilts, to record lows. The first negative-yielding bond appeared following Carney’s speech: a gilt maturing in March 2018 was trading at -0.003%. When interest rates are negative, investors effectively pay the government and banks to park their money.

Mitul Patel, the head of interest rates at Henderson Global Investors, said: “The market now expects interest rates to fall to close to 0%, and while Carney has previously stated a dislike of negative interest rates, nothing can be taken off the table.”

Carney said the Bank’s nine-member monetary policy committee, which sets interest rates, faces a trade-off between stabilising inflation, which could be stoked by a weaker pound, and shoring up growth and jobs. But he erred on the side of supporting growth with lower borrowing costs.

“In my view, and I am not prejudging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer,” Carney said in the speech to bankers and business leaders.

“The committee will make an initial assessment on 14 July and a full assessment complete with a new forecast will follow in the August inflation report. In August, we will also discuss further the range of instruments at our disposal.”

Interest rates have been at 0.5% for more than seven years after they were slashed during the UK’s downturn and the global financial crisis. Before the referendum, economists were forecasting that in the event of a vote to stay, the next move in official interest rates would be up.

Carney had warned before the referendum that a vote to leave could cause a technical recession, defined as two consecutive quarters of falling output.

That warning had angered Brexit backers, with some accusing Carney of “talking down” the economy, an allegation repeated by the Ukip leader, Nigel Farage, following the governor’s comments. However, Carney stood by his predictions that a vote to leave would hurt growth, while trying to reassure his audience that he could work with the victorious leave campaigners.

In a press conference, he was asked how tenable his position as Bank chief was after the triumph of a leave campaign that had repeatedly accused him of politicising his role.

Referring to the Bank’s duties, he answered: “It would be irresponsible of me, or any of my other colleagues, to walk away from those obligations.”

Carney avoided the word “recession”, but reiterated the Bank’s pre-referendum forecast that a victory for the leave camp could “materially alter the outlook for growth and inflation,” with the risk that households and businesses defer investment.



In the past week, there have been signs that some companies are delaying or cancelling investment plans. A poll for YouGov found that consumer confidence had dived in the five days since the referendum.

Carney sought to reassure business owners, investors and households that the Bank stood ready to do more to restore confidence. “The question is not whether the UK will adjust, but rather how quickly and how well,” he said. But he also emphasised that there were limits to what a central bank could do.

Facebook Twitter Pinterest The Bank could cut interest rates as early as July. Photograph: Anthony Devlin/PA

“The Bank of England has a plan to achieve our objectives and by doing so support growth, jobs and wages during a time of considerable uncertainty.

“Part of that plan is ruthless truth telling. And one uncomfortable truth is that there are limits to what the Bank of England can do.”

In a nod to the role of government, Carney said: “The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policymakers.”

Carney stepped in almost immediately after the referendum result became clear last week and sought to calm financial market fears about the impact of the Brexit vote by insisting that Threadneedle Street would take any measures needed to secure economic and financial stability.

That morning, with the markets wrongfooted over the outcome of the EU referendum, Carney had stressed that banks were stronger than before the 2008 financial crisis.

Following the speech on Thursday, financial market players focussed on the immediate implications for interest rates and other monetary policy measures such as quantitative easing, whereby the Bank pumps electronic money into the financial system. But Carney also used the address to take a longer view of the build-up to the referendum and resulting market turmoil.

Without referring specifically to the vote, he highlighted a more pronounced focus on inequality as he discussed uncertainty and what he termed “economic post-traumatic stress disorder” among households and businesses.

“Today, uncertainty has meant an inchoate sense of economic insecurity for many people, despite generalised economic prosperity. Across the advanced economies, employment appears less secure, wages more subdued and inequality more pronounced,” Carney said.

Phil Shaw, a UK economist at fund manager Investec, said the governor’s delay of six weeks in publishing the first thorough review into the post-Brexit landscape would leave the City in limbo.

“We remember when Mervyn King said nothing for weeks after Northern Rock went bust and the uncertainty it created,” he said.

Shaw said the Bank was likely to supplement a rate cut with other measures, including an expansion of the funding for lending scheme that supports bank and building society mortgage lending.