Investors bet on UK interest rate cut as tax rises look less likely

Saleha Riaz
·2-min read
Andrew Bailey, Chief Executive Officer of the Financial Conduct Authority, poses for a photo as he arrives at the Reuters offices for an interview in London, Britain, July 6, 2017.  REUTERS/Hannah McKay
Bank of England governor Andrew Bailey. Photo: REUTERS/Hannah McKay

Investors think the Bank of England is increasingly likely to cut the UK’s interest rate as it looks to combat the economic effects of new lockdowns.

Markets are now pricing in a 50% chance of an interest rate cut this year, stockbroker AJ Bell (AJB.L) said, up from just 30% last week.

On Monday evening, prime minister Boris Johnson announced a national lockdown in England and Wales, instructing people to stay at home and ordering businesses and schools to shut. Similar measures are in place across the rest of the UK. The restrictions are likely to be hugely damaging to the UK’s economy.

The Bank of England cut interest rates to a record low of 0.1% last year to cushion the initial economic blow from the COVID-19 pandemic. The central bank has resisted cutting rates further but said it is preparing the groundwork for negative interest rates.

The next Bank of England policy meeting is at the beginning of February. Laith Khalaf, a financial analyst at AJ Bell, said Monetary Policy Committee members would “have time to take a deep breath and see how the next few weeks go.”

READ MORE: How a third lockdown will impact the UK economy

British banks are scrambling to prepare for negative interest rates, with senior leaders warning it could take up to 18 months to ready systems. Executives at British banks told MPs in November they were not yet ready for negative rates despite the Bank of England suggesting it could deploy them in early 2021.

While an interest rate looks increasingly likely, Khalaf said tax rises now looked less likely.

Cabinet secretary Michael Gove on Tuesday said current restrictions could last until March, leaving chancellor Rishi Sunak “in a tight spot, seeing as the budget has been scheduled for 3 March,” Khalaf said.

Sunak has repeatedly said it would look to balance the books when appropriate, suggesting tax rises were coming.

In November, the chancellor was urged to raise taxes on stock sales, second home disposals, and inherited property, in a radical overhaul that could help pay for the government’s COVID-19 response. It led to speculation that changes could be announced at the 2021 Budget.

New lockdowns mean there is less chance “the budget will be a platform for fiscal repair and more chance it will be about keeping the wheels of the economy turning,” Khalaf said.

The UK economy “is not going to be in great shape to bear the tax rises the Treasury has to push through to balance the books,” Khalaf said.

“But while tax rises may be delayed, they are still very much in the post.”

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