The City’s Reaction To 7/7 Bombings

The economic considerations of the London bomb attacks come a distant second to the lives that have been taken and terribly injuries sustained.

At the same time, however, questions have been raised over how the Bank of England might respond, if at all, to the attacks (especially given the after the attacks at the World Trade Centre in 2001, the reaction was to cut rates globally) and what the implications might be for the UK economy.

There are a number of factors to consider. First, the near term blow to sentiment comes at an unhelpful time in terms of consumer activity. Retail spending weakness is a key concern for the Bank of England as it attempts to prevent too rapid a decline in consumption. In that respect, Thursday's attack might bring a rate cut a bit closer. There is nothing to stop the Bank from cutting interest rates outside of the scheduled monthly MPC meeting (the July meeting culminated and left rates unchanged), but in our view a clear deterioration in the economy would need to be seen for this to happen. The next meeting takes place on 4th August.

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There has been some speculation that the bus bombing was a suicide attack. If confirmed, this would be unprecedented and clearly introduce greater uncertainty as to the household sector's likely response.

That said, we have two similar (albeit indirect) points of comparison which provide some reassurance. First, the UK is unfortunately more accustomed to bomb attacks than many countries, having spent decades under the shadow of IRA bombings. Though IRA targets were mostly political or financial, there were several large bomb attacks in shopping centres on busy days of the week and without effective warning being given. The UK consumers' response to this threat was to carry on as normal: there was no lasting impact whatsoever on retail sales (aside from the immediate practical limitations on activity on the day of the attack).

Second, subsequent to the attack of the World Trade Centre in September 2001, there was enormous uncertainty as to how US consumers would respond, with many expecting a defensive, hunkering down response. This was far from the reality. The following three months saw US retail sales rise at their fastest pace in over a decade.

So the evidence suggests that the reaction of the UK consumer will, after an initial nervous reaction, be to carry on as normal. With that in mind, we do not believe that the Bank of England will respond to what is an undeniably tragic but ultimately non-economic event with an economic policy response, i.e. the greater likelihood is that interest rates are still on hold until Q4.

By Steven Andrew, Chief EconomisF&C Asset Management