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City bets big on 25bp rate cut today

City bets big on 25bp rate cut today

Almost two thirds of economist predict that the Bank of England’s monetary policy committee (MPC) will cut rates later today with most predicting a fall of at least 25 basis points.

Market pricing suggests a 75% probability that the base rate of lending will be cut to a fresh record low. That rises to a near-certainty by the time of the August meeting.

Of 60 economists polled by Reuters 39 said that they expected rates to fall, with 35 of those saying the MPC would halve the current rate. As recently as last week, the median response of the poll suggested that the MPC would wait and watch.

Just two predicted that Mark Carney (pictured) would contradict previous statements about policy suitability and oversee a fall to zero, however. Another two expected a 40bp reduction to 10bp.  

James Spence, co-founder and managing partner at Cerno Capital, and manager of its Cerno Select fund, said he feared that this close to zero, the negative signalling of a rate cut could outweigh any stimulative effect of looser policy.

‘Once we reach zero in interest rates, we already know from Japan that the prospect of negative rates has clear adverse consequences for banks,’ said Spence.

‘Whilst more QE is plausible and likely, we again argue that it is of questionable benefit at this stage. Investors should not expect Central Banks to be snake charmers, they can defend the financial system from shock but they cannot create exogenous growth.’  

The Reuters survey suggested the majority of economists believe the bank will restart asset purchases for the first time since 2012 later this year, with seven expecting it to restart today.

In the immediate aftermath of the June 23 vote to leave the European Union, rates futures moved from indicating some normalisation of by 2018 to pricing any increase to 2026.

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Profile: how Cerno was forged in Asia's boom and bust

Profile: how Cerno was forged in Asia's boom and bust

Cerno Capital’s investment philosophy was born in the spectacular boom and bust of Asia in the 1990s.

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