There seems to be very little doubt that the Bank of England will move to cut UK interest rates when its Monetary Policy Committee (MPC) convenes this coming Thursday. All of the recent economic data -- notably the slew of purchasing managers' indices, but also industrial production data and anecdotal evidence from the retail sector -- all suggest that the economy has taken a serious hit in the wake of the Brexit vote on June 23. Seems all those warnings from economists, business groups, trade unions, the IMF et al weren't just fear-mongering after all.
Bank Governor Mark Carney, when he moved over from the Bank of Canada a few years ago, was widely lauded as the best central banker of his generation. As such, he'll probably be certain of one thing when he announces the rate cut: it isn't going to work.
Cutting rates won't do any actual harm to the UK economy, though a likely further fall in Sterling might be unwelcome news at the height of the summer holiday season. But does anyone really think that the price or availability of money is the key thing holding the economy back right now? In the UK and around the world, the most that can be said after several years of rock-bottom interest rates and money printing is that it has probably prevented things from becoming even worse. The "animal spirits" of entrepreneurs were supposed to be kindled by the enticement of free money; instead they seem to have gone into permanent hiding.
Layer the Brexit vote on top of this weak underlying picture and you have a recipe for real trouble. Markets hate uncertainty, and the Brexit vote has delivered that in spades. If the UK had awoken on June 24 to a Remain vote, all would have been fine: that was the expected outcome, even among the Leave campaigners. If the Leave win had seen the UK immediately exit the EU, there would have been a serious hit to the economy, but the clean certainty of such an outcome would have allowed businesses to plan for the new reality and start to move forward.
Instead of these definitive outcomes, the UK has conjured up the worst of all possible worlds. It is now abundantly clear that no-one had made any real plans for a Leave vote. The new government is making it up as it goes along, delaying the formal start of negotiations while it tries to figure out what it actually wants its future relationship with Europe to look like. Chancellor of the Exchequer Philip Hammond has remarked with remarkable insouciance that it could take six years for the actual Brexit to occur. That means the next general election will take place with the UK still nominally part of the EU. If that really is the timetable, there is very little that the Bank of England can do policy-wise to mitigate the damage.
Governor Carney will of course cast any move the Bank makes this week in the best possible light. While avoiding any harm to the economy, he will also be aware that the Brexit supporters are watching him like a hawk. Carney came under attack during the referendum campaign for having the effrontery to warn about the possible impact of a Leave vote. If he were to fail to cut rates now, and the economic data remain weak -- as they surely will -- the Leavers would be quick to accuse the Bank of subverting the will of the people.
It's a tough situation for Carney, whose non-Britishness is still an issue in some quarters. What will make the decision even more agonizing for him is the realization that he may be spending his limited ammunition a mite too soon. There are ominous signs that the long but slow expansion in the US economy may be starting to lose momentum. That would weigh heavily on the world economy as a whole, very possibly requiring a new round of co-ordinated central bank action. In cutting rates this week to offset the folly of the UK electorate and its leaders, Carney will be well aware that he may not be able to do much to help out if things really do take a turn for the worse.
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