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Bank of England could cut rates in days not weeks says RSM

Commenting on the current turmoil in the global financial markets, Kevin O’Connor, RSM’s regional managing partner for Yorkshire and the North East said:

“With markets reacting to the global health crisis and the accompanying supply shock, we could see the Bank of England cut its base rate by 0.5 per cent in the next few days rather than wait until its next scheduled meeting on 26 March.

“Growing stress in the domestic financial market will require both fiscal and monetary firepower to address supply and demand shocks currently cascading throughout the global economy.

“Yesterday’s meeting between the Prime Minister, the Chancellor and the Governor of the Bank of England has fueled speculation that coordinated action could be announced to coincide with next week’s Budget.

“We would also expect the other major central banks including the European Central Bank and the Bank of Japan to take similarly aggressive steps to engage in pre-cautionary rate cuts, make liquidity pledges and increase asset purchases where necessary to prepare for the negative impact.

“RSM’s Beyond Brexit Stress Index — which measures financial and economic risk surrounding Britain’s impending departure from Europe’s common market – has shot up in just the past two weeks from zero to 1.15 standard deviations above normal levels of implied stress.

“Instead of simply measuring the risks to UK economic growth during the months of trade negotiations to come, our stress index finds itself reacting to a shock to the global economy caused by the coronavirus outbreak and the effects on the UK that are sure to come.

“While moving rates closer to zero would suggest that at least one monetary tool will have reached its limit, a recent study has found that the quicker a monetary policy tool is implemented, the greater its effectiveness. So while the Bank of England rightly kept its policy rate low and steady during the turmoil and uncertainty of the Brexit process, the repercussions from the health crisis might be so severe as to justify a rate cut sooner than later.”

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