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Chief economist says BoE may cut rate before any increase

Chief economist says BoE may cut rate before any increase

According to its chief economist Andy Haldane, The Bank of England's next move may well be to cut rates rather than raise them as has been widely expected.

The surprise turnaround would be due to the increased risk of deflation if the UK economy does not pick up in the second half of this year.

Financial fallout

With the current global decline in oil prices and continuing turmoil of the Chinese economy at the forefront, Haldane used a recent speech to warn of the risks attached to the fallout from emerging economies.

If those risks were to materialise, he said that a rate cut would be a viable option.

With UK interest rates holding steady for more than six years at a record low of 0.5%, most observers expect the next change to be an upward one. However, if growth in the UK slows in the second half of 2015, inflation may not have any chance of reaching the BoE's targets.

Three-part crisis

Haldane called recent events in China and Greece as "the latest leg of what might be called a three-part crisis trilogy."

"The balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside," Haldane explained.

"Were the downside risks I have discussed to materialise, there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target," he added.

However, fellow member of the Monetary Policy Committee (MPC) Ian McCafferty has already voted for an interest rate increase at both the August and September MPC meetings, indicating that there is still disagreement and confusion as to what the next move on rates from the BoE might be.

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