City workers walk past the Bank of England in the City of London, Britain.Toby Melville/Reuters
The Bank of England is poised to ease monetary policy this week in response to weaker economic signals, corporate spending cuts and plunging business and consumer confidence since the shocking Brexit vote in June.
Most economy watchers predict a reduction in the benchmark rate of a quarter of a percentage point from its record low of 0.5 per cent, which has remained unchanged since early 2009, during the Great Recession. But no one would be surprised if the central bank also opts to ratchet up its bond-buying program, possibly including the purchase of corporate debt. And negative interest rates may not be far behind if conditions deteriorate markedly in the months ahead.
The central bank's monetary policy committee (MPC) defied market expectations by leaving rates unchanged at its first postreferendum meeting in mid-July. Only one voice on the nine-person committee – hedge-fund economist Gertjan Vlieghe, an independent member and a former assistant to previous governor Mervyn King – backed an immediate cut.
After better-than-forecast growth in the second quarter, others said they needed more evidence that the latest troubling soundings signify something more than knee-jerk reactions to the decision to pull Britain out of the European Union.
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Less than three weeks later, they appear to have found what they were looking for.
Governor Mark Carney is known to favour pre-emptive action to cushion the economy, after suggesting in a speech July 1 that it might be necessary to ease monetary policy "over the summer" to deal with the Brexit fallout.
But he was prepared to wait a few weeks rather than provoke a split with more hawkish outside members of the committee.
Now even they are morphing into policy doves.
Martin Weale, an economics professor and policy maker for the past six years, declared just two weeks ago that there wasn't enough evidence to justify more stimulus.
"In contrast to the experience of 2008, I do not have any sense that either consumers or businesses are panic-struck and … there have been no material signs of financial panic," Mr. Weale said in his final speech before stepping down this month.
Like most monetary hawks, he has been particularly concerned about the risks of stoking inflation, which is expected to show an uptick when the latest numbers are released Tuesday.
But he changed his mind after the release of gloomy business surveys for July, which herald a sharp contraction in demand in manufacturing and such key sectors as construction and retailing.
"They are the best short-term indicator we have at the moment," Dr. Weale told the Financial Times last week.
"I certainly feel they are very material for the decision we'll be taking."
On the consumer front, one monthly confidence gauge fell in July to its weakest level in three years.
A key finding that shouldn't come as a surprise: Homeowners fret about the possible decline in property values.
Surveys are "the only thing that the Bank of England really has to go on at present," Lucy O'Carroll, chief economist with Aberdeen Asset Management, said in a note.
"The question is ultimately whether the surveys will prove to be a reliable guide to activity, given the unusual nature of the post-referendum situation. Unfortunately we will not have a full answer until November, when third-quarter estimates for business investment and household spending are due to be published."
One MPC hawk, Kristin Forbes, an MIT professor, remains in the wait-and-see camp.
"Keep calm and carry on is a good motto to live by – as well as a good strategy for monetary policy," she wrote in a recent commentary.
But Mr. Carney is unlikely to wait that long before launching the bank's most aggressive intervention since the depths of the recession to keep the economy from going off the rails.
David Blanchflower, a Dartmouth economics professor and a BoE policy maker during the global crisis, suggests the bank could end up joining the European Central Bank and several other counterparts in Europe and Japan in the negative interest-rate club.
"I don't see this happening in August, but there is a distinct possibility down the road, if the data worsens further, as it well might, that rates will have to go negative," he wrote last week in the Guardian.
Royal Bank of Scotland and its NatWest subsidiary have already informed nearly 1.3 million business customers that they could face interest charges on cash deposits if the central bank heads down that path.