U.K. interest rates could be cut as soon as this month to shore up an economy that’s barely growing even as some Brexit uncertainty has dissipated, the Bank of England’s outgoing chief hinted Thursday.
Mark Carney said in a speech that there is a “debate” within the bank’s rate-setting Monetary Policy Committee “over the relative merits of near term stimulus to reinforce the expected recovery in U.K. growth and inflation.”
The bank is predicting an economic pick-up as some of the risks associated with Brexit have disappeared in the wake of last month’s election victory by Boris Johnson’s Conservatives. His big win has eliminated any near-term fears that Britain would leave the EU without a withdrawal agreement to smooth its exit from the bloc.
“Much hinges on the speed with which domestic confidence returns,” Carney said.
And if evidence of a pick-up in growth doesn’t materialize soon, he said action could be taken swiftly. He even said it’s possible that the bank could restart its monetary stimulus program, which pumps money into the economy.
“There are downside risks from global growth and the possibility that uncertainties over future trading relationships could remain entrenched,” said Carney, who will be replaced in March by a former bank deputy governor, Andrew Bailey.
“If evidence builds that the weakness in activity could persist, risk management considerations would favor a relatively prompt response,” he added.
The response in financial markets was swift as traders priced in a possible quarter-point reduction in the bank’s main interest rate from 0.75% at the next policy meeting – Carney’s last one after seven years at the helm – on Jan. 30. The pound has fallen 0.6% to a two-week low of $1.3019.
Recent indicators have not been pointing to any big improvement in the British economy. Most economists think the economy will have done well to eke out growth any higher than 1% last year.
Brexit uncertainty has been largely to blame for a period of tepid growth.
Firms have been holding back investment amid fears that Britain would leave the EU without a divorce deal while consumers have become cautious. Though the British economy avoided a recession many had been predicting in the immediate aftermath of the Brexit vote in June 2016, Carney said there had clearly been a hit to growth. Without Brexit, he said the British economy could be 3% bigger than it is currently.
Earlier Thursday, the British Retail Consortium, an industry association, said that 2019 was the worst year for retailers in a quarter of a century. Disappointing Christmas sales figures from an array of big retailers, such as Marks & Spencer and John Lewis, appeared to back up that gloomy view.
Some Brexit uncertainty remains, meanwhile, as it’s still not clear what the economic relationship between Britain and the EU will look like beyond the end of this year.
After Britain officially leaves the EU, it goes into a so-called transition period through the end of the year during which it will remain part of the EU’s tariff-free single market and customs union. Johnson has said that he won’t request an extension to that transition period. That means uncertainty will likely remain a drag on growth this year.