UK rate cut could come soon, Bank of England chief hints

The outgoing head of the Bank of England has hinted that U.K. interest rates could be cut soon to shore up the economy even as some of the Brexit uncertainty has dissipated

Mark Carney said in a speech that there is a “debate” within the bank's rate-setting Monetary Policy Committee “over the relative merits of near term stimulus to reinforce the expected recovery in U.K. growth and inflation."

“Much hinges on the speed with which domestic confidence returns," Carney said.

And if evidence of a pick-up in growth doesn't materialize soon, he said action could be taken swiftly. He even said it's possible that the bank could restart its monetary stimulus program, which pumps money into the economy.

“There are downside risks from global growth and the possibility that uncertainties over future trading relationships could remain entrenched,” said Carney, who will be replaced in March by a former bank deputy governor, Andrew Bailey.

“If evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response," he added.

The response in financial markets was swift as traders priced in a possible quarter-point reduction from the current 0.75%, potentially as soon as the bank's next policy meeting — Carney's last one after seven years at the helm — on Jan. 30. The pound fell 0.6% to a two-week low of $1.3019 before recovering somewhat to trade at $1.3060.

At the last rate-setting meeting in December, two of the nine members of the MPC voted for a quarter-point interest rate reduction. Few Bank watchers were expecting many more to back a cut in January, until Carney's speech.

“Markets will be highly responsive to the flow of economic data, now that the MPC's next few meetings are ‘live’,” said Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics.

Tombs doesn't think the bank will back a rate cut but has pushed out his prediction of the next hike to mid-2021 from his previous expectation of the the third quarter of this year.

Recent indicators have not been pointing to any big improvement in the British economy. Most economists think the economy will have done well to eke out growth any higher than 1% last year.

Brexit uncertainty has been largely to blame for a period of tepid growth.

Firms have been holding back investment amid fears that Britain would leave the EU without a divorce deal while consumers have become cautious. Though the British economy avoided a recession many had been predicting in the immediate aftermath of the Brexit vote in June 2016, Carney said there had clearly been a hit to growth. Without Brexit, he said the British economy could be 3% bigger than it is currently.

Earlier Thursday, the British Retail Consortium, an industry association, said that 2019 was the worst year for retailers in a quarter of a century. Disappointing Christmas sales figures from an array of big retailers, such as Marks & Spencer and John Lewis, appeared to back up that gloomy view.

Some Brexit uncertainty remains, meanwhile, as it's still not clear what the economic relationship between Britain and the EU will look like beyond the end of this year.

After Britain officially leaves the EU, it goes into a so-called transition period through the end of the year during which it will remain part of the EU's tariff-free single market and customs union. Johnson has said that he won't request an extension to that transition period. That means uncertainty will likely remain a drag on growth this year.