Bank of England expected to cut interest rates to record low

Post-Brexit slowdown expected to shrink Britain’s economy and lead to first rate cut in seven years

The Bank of England is expected to cut interest rates on Thursday for the first time in seven years following confirmation of the sharpest slowdown in the British economy since 2009.

The slowdown following June’s vote to leave the EU means that Britain’s economy is now expected to shrink by 0.4 per cent in the three months to September.

Financial data company Markit’s monthly all-sector Purchasing Managers’ Index (PMI) showed its steepest month-on-month fall since 2009, the last time the bank cut interest rates to their current level of 0.5 per cent.

With private sector services experiencing an especially sharp decline, Chris Williamson, Markit's chief economist, said the bank is all but certain to cut rates to 0.25 per cent.

“The PMI is already deep into territory which would normally spur the Bank of England into taking action to stimulate the economy. A quarter-point cut in interest rates therefore seems to be a foregone conclusion at tomorrow’s monetary policy committee meeting, though the extent and nature of other non-standard stimulus measures remains a far greater source of uncertainty and the subject of intense speculation.”

Economic indicators

Markit’s PMI for services for July fell from 52.3 to 47.4 in June, while a composite PMI – including manufacturing as well as services – dropped from 52.5 to 47.5. Any figure below 50 suggests that activity is contracting.

“It’s too early to say if the surveys will remain in such weak territory in coming months, leaving substantial uncertainty over the extent of any potential downturn. However, the unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession,” Mr Williamson said.

The latest evidence of the negative impact of Brexit on the economy comes as Britain's National Institute of Economic and Social Research said it saw a 50 per cent chance of recession by the end of next year.

Blaming Brexit

Opposition politicians blamed the uncertainty surrounding Britain’s future relationship with the EU for the fall in business confidence, demanding that prime minister

Theresa May

should state clearly that she wants Britain to remain within the Single Market. Liberal Democrat leader

Tim Farron

said the country needed certainty, instead of “dithering and posturing” over Brexit.

“Five weeks on, the government still doesn’t have a plan. Companies are clearly spooked by fears that British business will be locked out of the Single Market. Rather than posturing, Theresa May must make clear that whatever else happens in Brexit negotiations, Britain will make it a priority to stay in the Single Market.”

Ms May’s cabinet is divided over key questions surrounding the relationship Britain should seek with the EU after Brexit. Some of those who campaigned for Brexit insist that there can be no compromise on ending the free movement of people from the EU in return for remaining in the Single Market.

Others, including international trade secretary Liam Fox, want Britain to leave the EU customs union as well as the Single Market so that the UK can negotiate new bilateral trade deals around the world.