Bank of England prepares to tackle Brexit hit

Fri Jul 29, 2016 11:02am EDT
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By William Schomberg

LONDON (Reuters) - The Bank of England (BoE) must decide over the coming week how much trouble Britain's economy is in following the shock vote to leave the European Union, and how much firepower it can throw at the problem.

After the Bank of Japan (BoJ) on Friday disappointed expectations of a major new stimulus drive, the BoE could even add to the Brexit uncertainty in Britain if it simply shaves its already record-low interest rates, some economists say.

A Reuters poll of economists published on July 26 predicted the British central bank would cut its benchmark Bank Rate to 0.25 percent from 0.50 percent on Aug. 4, but most said it would not revive its massive bond-buying program for now.

Adam Posen, a former BoE rate setter, urged the BoE to cut rates to zero - despite Governor Mark Carney's concerns that such a move could hurt banks - and also send a clear signal that further bold action is on the way.

"It's not clear that the Bank of England carefully calibrating its response and communicating the message that they are worried about an uptick in inflation would do anything to stabilize the situation," Posen said. "It probably would be counterproductive."

The bank might take interim measures to help the economy, such as more encouragement for bank lending, while it waits for clearer signs of the extent of the Brexit hit to the economy.

Until now, it has not had to contemplate the kind of radical decisions taken by the BoJ and the European Central Bank (ECB), both of which have cut interest rates below zero as they try to spark their economies into life.

Britain has been among the fastest-growing of rich economies for much of the last three years.   Continued...

City workers walk past the Bank of England in the City of London, Britain, March 29, 2016.  REUTERS/Toby Melville/File Photo