Thursday 04 August 2016 3:15 am

Over to you, Mark II: City A.M. Shadow MPC votes for interest rate cut

City economists have called on Mark Carney to pull the trigger and cut interest rates for the first time in seven and a half years today.

City A.M.’s Shadow monetary policy committee (MPC) voted five to four in favour of slashing rates to a new all-time low of 0.25 per cent. Futures markets indicate a cut is a dead-certainty, but Threadneedle Street shocked markets last month when it failed to budge.

Interest rates are currently at their lowest ever level in the Bank’s 322-year history of 0.5 per cent and have not budged since March 2009. Mark Carney, who has been governor since the summer of 2013, has never once advocated a shift in monetary policy.

The panel recommended holding back on unleashing a new round of bond-buying, however, as City A.M.'s would-be ratesetters favoured waiting for more hard data before emptying the Bank of England’s arsenal. The Bank's stock of assets snapped up after the financial crisis currently stands at £375bn, but economists consider another spending spree of between £50bn and £100bn a possibility.

News since the referendum has painted a mixed picture as to the health of the UK economy. The financial markets have largely recovered, but business surveys have shown record falls in confidence. This week’s purchasing managers’ indexes (PMI) point to a 0.4 per cent contraction in the third quarter of the year.

“Signs of collapsing confidence and cutbacks in output and orders have multiplied and urgent action is needed to limit the slowdown,” said Centre for Economics and Business Research (CEBR) adviser Vicky Pryce.

Kallum Pickering of Berenberg said he wanted to see monetary policy loosed to “support confidence and domestic demand” in the face of the confidence shock of the vote to leave.

Purchasing managers' index (PMI) scores are in territory which has provoked a 50 basis point cut to interest rates in the past.

Both Pickering and Pryce voted to extend the Bank’s quantitative easing programme, though the other seven members voted against such a drastic move.

“Quantitative easing should be left on hold until the fiscal and economic outlook are clearer,” said Adam Chester, head of economics at Lloyds.

Brian Hilliard of Societe Generale and Ross Walker of RBS agreed quantitative easing may need to be deployed at some point over the summer.

This month’s guest chair, former business secretary Vince Cable, however, was in the minority of four voting to hold rates. He said he was “sceptical of indefinite loose monetary policy” and said it should be up to the government, not the Bank of England to stimulate the economy at times like this.

The Bank’s decision on interest rates and quantitative easing will be unveiled at midday along with the Old Lady’s latest forecasts for growth, wages, prices and unemployment in the market-moving Inflation Report.

City A.M. Shadow MPC

Guest chair: Vince Cable

Vote: Hold interest rates. Hold quantitative easing

The fashionable advocacy of negative interest rates worries me; there is little evidence, notably from Japan, that it works. I am generally sceptical of indefinite loose monetary policy.

The problem is radical uncertainty for investors. I would use fiscal policy instead: public investment via the Regional Growth Fund and Green Investment Bank to leverage in risk-averse private investment; free up borrowing to invest by Network Rail and local authorities; give tax incentives via investment allowances and rate relief.

Simon Ward, Henderson

Vote: Hold interest rates. Hold quantitative easing.

Policy must try to balance growth and inflation risks. Wait for more evidence, particularly on post-referendum monetary trends.

Adam Chester, Lloyds Banking Group

Vote: Cut interest rates to 0.25 per cent. Hold quantitative easing.

The case for further easing is not clear cut. Although recent surveys point to an economic slowdown, financial market sentiment has improved.

Kallum Pickering, Berenberg

Vote: Cut interest rates to 0.25 per cent. Extend quantitative easing by £75bn.

The current and expected economic weakness following the Brexit vote warrants a monetary expansion to support confidence and domestic demand.

Vicky Pryce, Centre for Economics and Business Research

Vote: Cut interest rates to 0.25 per cent. Extend quantitative easing by £50 – £100bn

Signs of collapsing confidence and cutbacks in output and orders have multiplied and urgent action is needed to limit the slowdown in activity.

Brian Hilliard, Societe Generale

Vote: Cut interest rates to 0.25 per cent. Hold quantitative easing

Make it clear that any further cut would be counter-productive because of its adverse effect on bank profitability and thus lending capacity. I would hold quantitative easing in reserve, to be used as necessary, once the immediate impact of Brexit had become clearer.

James Sproule, Institute of Directors

Vote: Hold interest rates. Hold quantitative easing

Confidence post Brexit, not capital cost, is key. Businesses remain optimistic about their own prospects, but cautious about wider economy.

Ross Walker, Royal Bank of Scotland

Vote: Cut interest rates to 0.25 per cent. Hold quantitative easing

Monetary policy options are constrained, but there is some scope to cut rates and revamp term funding programmes. A resumption of quantitative easing could well be warranted at a later stage.