Bank of England governor Mark Carney has signalled interest rates could be cut over the summer to bolster the economy after the Brexit vote, but warned growth could be hit “for some time”.
Mr Carney said in his personal view, “some monetary policy easing will likely be required over the summer”, signalling a rate cut next month or in August.
He also hinted that the Bank could pump more cash into the economy under its quantitative easing programme and said the Financial Policy Committee could take action when it meets next Tuesday.
His comments fuelled further impressive gains on the FTSE 100 Index, which surged to its highest level since last December, but the rate cut prospects sent the pound sharply lower once more.
Mr Carney said Britain was grappling with “economic post-traumatic stress disorder” following the vote to leave the European Union.
However, he said the decision would not be his to take alone and the final call would be made by the Monetary Policy Committee in two weeks.
He said: “In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing is likely to be required over the summer.”
The comments dash previous forecasts by the Bank before Britain’s referendum on the European Union, which predicted the next move for interest rates would be for them to rise.
Mr Carney also said that the Bank would take further action to ease uncertainty by providing “additional flexibility” in its provision of liquidity insurance by continuing to offer Indexed Long-Term Repo operations weekly until the end of September.
It comes after the governor stepped in to calm a plunge in UK financial markets minutes after the Brexit decision was announced by pledging to pump at least £250 billion into money markets if needed to prevent a credit squeeze.
In an effort to offer more words of reassurance, Mr Carney said “the UK can handle change”, adding “it has one of the most flexible economies in the world and benefits from a deep reservoir of human capital, world-class infrastructure and the rule of law.
“Its people are admired the world over for their strength under adversity. The question is not whether the UK will adjust but rather how quickly and how well.”
He said: “Over the past few months, working closely with the Chancellor and with HM Treasury, we put in place contingency plans for the initial market shocks. They are working well.”
However, he also warned that “as result of increased uncertainty and tighter financial conditions, UK households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise”.
The Bank of England is expecting UK gross domestic product to hit 2 per cent this year as it comes under fire from increased uncertainty caused by Brexit.
However, economists have been more gloomy, with IHS Global Insight cutting its forecasts to 1.5 per cent from 2 per cent for 2016 and to 0.2 per cent from 2.4 per cent for 2017.