Bank of England faces pressure to slash interest rates after US central bank makes emergency cut
NewsColony
THE Bank of England may be under pressure to slash interest rates following the Federal Reserve Bank’s dramatic decision to cut rates in the US by 0.5 per cent yesterday.
The Fed made its emergency call to cut rates in response to growing fears about the impact of coronavirus on the global economy.
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The Bank of Canada has also cut rates by 0.50 per cent.
Russ Mould, investment director at AJ Bell said: “The more central banks around the world cut interest rates, the more the Bank of England is likely to join the herd.
“Central banks in America and Australia have already moved and Europe and Japan have begun to consider it.”
Stuart Law, CEO at Assetz Capital added: “A technical recession in H1 2020 is looking increasingly likely due to the economic impact of the coronavirus on GDP in the UK.
“If this happens, we expect the Bank of England to cut rates and even follow in the footsteps of central banks around the world by cutting interest rates to below zero to stimulate the economy later in the year.”
On Tuesday, Mark Carney the current Governor, suggested that the Bank would consider cutting rates to soften the impact of the coronavirus outbreak on the UK economy.
Meanwhile, Andrew Bailey, the incoming Governor said today that the bank does not have a lot of room to manoeuvre on policy, but could lower rates to 0.10 per cent, ForexLive.com reports.
HOW WOULD LOWER INTEREST RATES EFFECT YOU
RUSS Mould, investment director at AJ Bell examines how your could be affected if the Bank of England gives in to pressure to cut rates.
- Lower borrowing costs could help those with mortgages, and especially first-time house buyers, or those with heavy borrowings elsewhere, through credit cards.
- They will however penalise diligent savers who have cash in the bank, or at least make those people feel forced to take more risk to try and get a return on their money by putting it into the stock market.
- Banks will be very upset as lower interest rates make it harder for them to make a profit on their loan books. They might therefore lend less.
How will a rate cut effect the economy?
While investment markets responded well to the news of the Federal Bank’s decision, experts are concerned that central banks are jumping the gun.
Seema Shah, chief strategist at Principal Global Investors, said: “Questions still remain about how policy rate cuts can help the economy if quarantines and travel barriers are introduced.
“Certainly, rate cuts will not help re-stock emptying grocery shelves. Monetary policy is hopeless when supply simply cannot feed demand.”
Analysts are also concerned that the Fed has left itself unprepared if the impact of coronavirus turns out to be temporary.
Shah continued: “The Fed was already facing a dearth of policy options for the next recession, today’s move leaves it with almost no cushion and the economy with a limited safety net.”
Despite the criticism of the Fed’s decision from investment experts, there is mounting pressure on the Bank of England to introduce similar cuts.
If the Bank of England does cut rates, it could exacerbate issues for UK savers and businesses, rather than making things better.
Law said: “Such an outcome would make it even harder for savers to guarantee a good return on their investments in an already tumultuous economic environment.
“Businesses will not only struggle to import necessary goods from China, but will also be squeezed by these reduced interest rates from the banks.”
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Mould added: “Any economic shock caused by Coronavirus would have to be very bad to really justify a rate cut, especially as the Bank of England has very little wiggle room, with the headline base rate already standing at just 0.75 per cent.
“If a real recession does hit, the rates could end up at zero or even going negative – and that would mean, in a most extreme case, savers are charged for keeping money in the bank.”
This means that the Bank of England has to maintain a tricky balancing act, keeping an eye both on the economic consequences of coronavirus, whilst also considering the longer-term health of the economy.
Shane Balkham, chief investment officer at Beaufort Investment, concluded: “Markets will continue to be volatile until coronavirus is brought under control.
“For investors, now is the time to hold your nerve and not be tempted into a knee-jerk reaction of selling your long-term investments in response to short-term market mayhem.”
You can get updates on the spread of the coronavirus via our live blog.
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Governor of the Bank of England, Mark Carney, has warned today that the economic shock from coronavirus could “prove large”.
And Coronavirus could cause the worst financial crisis for a decade, says OECD.
But the FTSE 100 rose by over two per cent yesterday as markets began to recover from coronavirus panic.
Source: The Sun UK
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