The Bank of England will move to slash interest rates to zero within months as Britain grapples with the economic impact of Brexit, City experts have said.
The Bank’s Monetary Policy Committee (MPC) will drive down rates to rock-bottom levels by the end of August as heightened uncertainty hits UK economic growth, according to JP Morgan.
Analyst Malcolm Barr said: “The Bank of England has argued that the policy consequences of a decision to leave are not clear-cut, because even as growth slows and unemployment rises, the fall in sterling will lift inflation.
“Nevertheless, we expect the Bank of England to be very active, initially in providing verbal reassurance that price stability and financial stability will be maintained and subsequently in delivering actual monetary easing.
“Even though the labour market is relatively tight, we expect the real economy effects to dominate in the Bank of England’s thinking.”
All nine-members of the MPC voted earlier this month to keep interest rates on hold at 0.5%, where they have been since March 2009.
However, David Tinsley, UK economist at UBS, said the Bank may cut rates to zero by no later than February 2017, as Britain comes under fire from “sharply lower growth”.
He added: “For the UK the immediate consequence is a significant rise in economic uncertainty, especially as the future of trading relationships between the UK and the EU is expected to remain unclear for some time.
“As a result we expect a further deceleration in growth, to around zero for a number of quarters. For the Bank of England we think the sharp loss of momentum will trump short-term inflationary impacts from any potential decline in sterling.”
It comes after economists moved to cut their predictions for UK economic growth as uncertainty ramps up following the vote to leave the EU.
IHS Global Insight said it is “substantially cutting” its GDP growth forecasts to 1.5% from 2% for 2016 and to 0.2% from 2.4% for 2017.
Capital Economics also downgraded its forecast for UK GDP growth in 2016 from just above 2% to 1.5%.
The Bank warned in its MPC minutes last week that a Brexit vote could lead to a “materially lower” growth outlook and ramp up inflation as the pound was likely to plunge in value.