Bank of England Expected to Cut Interest Rates to Historic Lows

On Thursday, the Bank of England will meet to decide on an interest rate cut. It’s widely expected by economic officials that the UK’s central bank will cut rates 25 basis points, from .50% to .25%. What will this mean for a country already reeling from the economic crunch post Brexit?

A rate decrease will prove to mark a historic low. According to International Business Times:

The BoE has kept interest rates at a historic low for the last seven years and the expected cut would bring the benchmark into uncharted territory. When Britain’s central bank cut the benchmark to 0.5% in 2009, the lowest since the BoE was founded in 1694, it described the figure as an ‘emergency rate’ and for the past seven years savers, institutions, fund managers, and economists have believed a rate rise was just around the corner.”

Few anticipate a rate lowering to zero or even negative levels; however, it’s still not out of the question. Other central banks, including Danmarks Nationalbank, the European Central Bank, Sveriges Riksbank, the Swiss National Bank, and Bank of Japan, have all cut rates to or below zero over the last few years.

A rate below zero interest would almost certainly drive gold prices up. Britain’s largest bank, HSBC, published a report last March concluding that negative interest rates are great news for gold investors. After the Bank of Japan went negative, a gold buying frenzy ensued.

Just before the Brexit vote, Britain began hoarding gold, with some online sites seeing a 5 to10% increase in sales. Just like Japan, it’s likely many British citizens will follow suit with an increase in buying gold and silver to hedge against inflation and preserve their wealth.

Some pundits see Britain’s interest manipulation as evidence central banks are “running out of options to lift fragile economies after the 2007 crisis, even by the unconventional means they have adopted so far.” The IBT article states:

Some say it is time to take up more radical measures, such as helicopter money, which consists of a bank printing money and dropping in onto citizens in order to kick-start the economy.”

“Free” Helicopter money is intended to prompt everyday citizens to spend rather than save, which is contrary to how to get out of a recession. Saving for investment and production is how you crawl out of an economic downturn. Increasing the money supply will only decrease the value of the pound, much as it’s done with the dollar. With no incentive to save, consumers will only get themselves further into debt with a currency that is becoming less valuable every day.

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