Recent UK economic data including yesterday’s Markit/CIPS UK PMI Services survey reinforced expectations that the Bank of England will cut its main interest rate today at 12:00 from 0.50% to 0.25%. Yesterday’s UK PMI Services survey found that Services output and new business both fell at the fastest rates since March 2009.
Chris Williamson, Chief Economist at Markit, which compiles the survey reported that:
“The marked service sector downturn follows news from sister PMI surveys showing construction activity suffering its steepest decline since mid-2009 and manufacturing output contracting at the fastest rate since late-2012. At these levels, the PMI data are collectively signalling a 0.4% quarterly rate of decline of GDP.
It’s too early to say if the surveys will remain in such weak territory in coming months, leaving substantial uncertainty over the extent of any potential downturn. However, 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.
Services providers are certainly bracing themselves for worse to come, with a record drop in business confidence about the year ahead leaving optimism at its lowest ebb since February 2009.
However, the extent of any downturn clearly depends to some degree on the policy response. The PMI is already deep into territory which would normally spur the Bank of England into taking action to stimulate the economy. A quarter-point cut in interest rates therefore seems to be a foregone conclusion at tomorrow’s Monetary Policy Committee meeting, though the extent and nature of other non-standard stimulus measures remains a far greater source of uncertainty and the subject of intense speculation.”
Cuts in Central bank interest rates weaken the home currency as investors sell the associated currency to buy higher yielding currencies known as a carry trade.
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