BOE cuts main rate to record low 0.25% for 1st time since 2009
THE Bank of England cut interest rates yesterday for the first time since 2009, revived its bond-buying program and said it would take “whatever action is necessary” to achieve stability in the wake of Britain’s vote to leave the European Union.
The central bank said it expected the economy to stagnate for the rest of 2016 and suffer weak growth throughout next year. It cut its main lending rate to a record low 0.25 percent from 0.5 percent, in line with market expectations.
But it also launched two new schemes, one to buy 10 billion pounds (US$13 billion) of high-grade corporate bonds and another — potentially worth up to 100 billion pounds — to ensure banks keep lending even after the cut in interest rates.
The pound fell 1 percent against the dollar following the announcement, while British government bond yields hit record lows and the main share index rose by 1 percent.
Rate to be cut
Most Monetary Policy Committee members also expected to cut Bank rate again this year to “close to, but a little above zero,” if the economy did as poorly as forecast.
“Following the United Kingdom’s vote to leave the European Union, the exchange rate has fallen and the outlook for growth in the short-to-medium term has weakened markedly,” the BOE said in its quarterly Inflation Report.
BOE Governor Mark Carney said he had acted because the economic outlook had changed markedly following the Brexit vote.
“By acting early and comprehensively, the MPC can reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments in the UK economy,” he told a news conference yesterday.
“The bank continues to stand ready to take whatever action is needed to achieve its objectives for monetary and financial stability as the UK adjusts to new realities, and moves forward to seize new opportunities, outside the EU,” Carney said.
Finance Minister Philip Hammond welcomed the rate cut and said he and Carney had “the tools we need to support the economy as we begin this new chapter and address the challenges ahead.”
Policy makers were not completely united on how to respond to the fallout from Brexit. The cut in Bank Rate and the measure intended to ensure banks passed it on to consumers — known as the Term Funding Scheme — gained unanimous support.
But three policy makers — Kristin Forbes, Ian McCafferty and Martin Weale — opposed raising the target for quantitative easing government bond purchases to 435 billion pounds from the 375 billion total reached in late 2012.
Forbes also opposed the buying of corporate debt — something the BOE did briefly after the financial crisis, but more to aid market functioning than to boost growth.
Many economists had expected Forbes to oppose a rate cut after she said last month that the central bank should not panic and instead wait for more data on the scale of Britain’s economic slowdown.
Daniel Mahoney of the Centre for Policy Studies pointed to the inflationary effect of the BOE’s easing measures.
“The bank’s further loosening of monetary policy could prove problematic for the UK economy. The falling pound means that inflationary pressures are already building up, and today’s decision will exacerbate them,” he said.
While many business surveys show Britain’s economy has slowed sharply and may even be entering recession, it is too soon for official data on how the EU vote is affecting output.
The BOE left its forecast for growth this year steady at 2 percent, as the economy grew faster in the first half of 2016 than it had expected in May.
But 2017 brings a sharp downgrade to growth of just 0.8 percent from a previous estimate of 2.3 percent — the biggest downgrade in growth from one inflation report to the next, exceeding what was seen in the financial crisis. The growth outlook for 2018 was cut to 1.8 percent.
The BOE also revised up its inflation forecasts sharply, due to the big fall in the pound since the financial crisis, predicting it will hit 2.4 percent in 2018 and 2019. The MPC said the costs of trying to bring it back to its 2 percent target in the immediate future would exceed the benefit.
The MPC launched the Term Funding Scheme to make sure that the lower levels of interest rates now set by the BOE are reflected in the costs commercial banks charge households and companies to borrow funds.
The BOE said it doesn’t expect the scheme to lead to much faster aggregate loan growth.
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