Economic slowdown could force Bank of England to cut interest rates

The menace of a downturn should make interest rate-setters at the Bank of England to rethink policies to raise the cost of borrowing, City economists have declared.

The Monetary Policy Committee is under stress to increase the cost of borrowing amid concerns over rising consumer debt and soaring inflation.

Three out of eight members voted for an increase this month, and chief economist Andy Haldane has shown him close to backing them.

City analysts think it would be a mistake. However, that could worsen an economic downturn and increase the impact of escalating inflation.

Simon Wells of HSBC said: “We’ve been here before in 2011 and 2014. There are good reasons why a rate rise shouldn’t be imminent.

“First, wage growth and domestically-generated inflation remain weak. Second, there are signs the economy is slowing quite rapidly.”

“Inflation is not being driven by domestic factors that the Bank can control,” Mr Wells said.

Anna Stupnytska at Fidelity International said that after such a one-off increase in the UK, new interest rate reductions are more likely than further raises.

She said: “We have some options here. Mark Carney has said that he will never go into negative interest rate territory, but they can explore more options – potentially cutting interest rates to 0.1pc, and then more QE or corporate bond QE.”

She fears that some leading signs suggest the global economy is diminishing, and that will have a knock-on result on the UK.

Mr Carney recently openly explained his principles for voting for an interest rate rise.

The comments, along with those of Mr Haldane, shocked markets last week. The value of the pound surged against a basket of currencies, while UK two-year gilt yields soared to their highest since before the Brexit vote.

Markets believe the Bank is more likely than not to raise interest rates by November and have thoroughly assessed in a rate hike next year. In the watch of the General Election, investors did not consider interest rates would rise until the start of 2020.

However, investors continue to be negative about the likely economic shock of Brexit, while the desire for bonds, usually seen as a haven in a downturn, remains stable.