UK rate decision looms amid recession warning

Sterling was little changed at 83.93 pence against the euro, but dropped to $1.3323 against the dollar as the Bank of England prepared to announce its interest-rate decision today.

The currency was caught between weaker UK economic data and extreme positioning that makes sterling especially vulnerable to a surprise outcome.

The survey showed the UK’s economy was shrinking at its fastest rate since the financial crisis after last month’s Brexit vote, making a Bank of England rate cut today a “foregone conclusion”, according to Markit research company.

Its monthly UK purchasing managers’ index (PMI) chalked up the steepest month-on-month decline on record after big falls in activity at private-sector services, manufacturing and construction firms.

“The unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession,” Chris Williamson, Markit’s chief economist, said.

The numbers — which broadly match an early version two weeks ago — pointed to Britain’s economy shrinking by 0.4% in the three months to September, a decline not seen since early 2009 when the Bank of England last cut interest rates, he added.

Companies had “widely reported that the outcome of the EU referendum had weighed on new business”, Markit said.

Britain’s National Institute of Economic and Social Research also said it expected the UK economy to shrink 0.2% between June and September. It saw a 50% chance of recession by the end of next year.

That added to speculation the Bank of England will ease policy to head off an economic slowdown. All but two of 52 economists in a Bloomberg survey predicted a cut in rates today.

A separate Reuters poll suggested the slide for sterling against the dollar was not over, projecting the currency would fall to a level not seen in over three decades.

Against the euro, sterling was worth about 76.5 pence before the June 23 vote.

Almost all economists expect the Bank of England to reduce rates by at least a quarter percentage point to a record low of 0.25%, but they are more split on whether it will restart its quantitative easing programme of government bond purchases.

“It’s a tempting policy to restart, but if you look at it objectively through the channels through which it operates ... there’s not that much scope to do anything more,” Investec economist Philip Shaw said.

NIESR said it did not expect the coming slowdown to match that seen during the global financial crisis.

Markit said it was too early to know if the PMIs would stay as weak as they are now, but added that confidence about the year ahead was at its lowest ebb since February 2009 among firms in the services sector, the engine of the British economy.


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