On the eve of one of the most influential economic events in the last 100 years, the financial meltdown of 2008, British interest rates stood at a very healthy 5 percent. In the turbulent weeks and months that followed, the Bank of England (BoE) aggressively chopped the rates down until by early 2009 they stood at 0.5 percent.
The broad assumption that ultra-low interest rates were just a temporary stop-gap to the financial situation of the time has proved completely untrue, and much to the dismay of even the most pessimistic of economists, this month, the BoE are considering a further cut, this time from the current rate of 0.25 to a miniscule 0.1 percent.
In the wake of the 2007-2009 economic troubles, the global financial system has never returned to full speed. Real incomes have declined, growth has remained stagnant and anti-establishment sentiment has never been higher, symbolized by the British vote to leave the EU and Donald Trump’s chequered attempts to win the U.S. presidential race.
As the UK’s central bank ponders the various implications that an exit from the euro zone financial bloc will bring, a possible further interest rate cut would not really be that surprising a move. The cut could even be as early as late December. The monetary policy committees (MPC) left the 0.25 percent level unchanged at the end of their last meeting, but the indicators are that they will continue with the easing strategy moving forward into next year.
“I don’t think the BoE are going to change their tact,” said Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management on the company’s blog. “Economists in general are surprised that the UK economy has fared as well as it has post-Brexit, but most of us know that the test will be in the long run, and the financial authorities are going to do everything they can to spur spending.”
The MPC predicted that the UK economy would virtually come to a standstill after the British public voted to leave the European Union. That hasn’t happened, and when all the data is collected it may even show that growth is even better than last month’s projections.
The BoE will stay safe at their next meeting, according to many observers, but the rate cut will come sooner rather than later. The main purpose is to add further downward pressure on the sterling in order to stimulate foreign orders for British products and boost international trade in general.
