Bank of England cuts interest rates to 0.25% and expands QE

Mark Carney

UK interest rates have been cut for the first time in seven years as part of a wide package of Bank of England measures to shore up the economy in the wake of the Brexit vote.

Related: Bank of England cuts interest rates to 0.25% - live updates

The Bank cut official interest rates to a new record low of 0.25% from 0.5% and signalled they would be reduced further in coming months. It slashed its forecasts for UK economic growth by an unprecedented amount and implied the UK would have suffered a downturn without these new measures.

Warning that the decision to leave the EU in June’s referendum would stoke inflation and push up unemployment, the Bank’s monetary policy committee unveiled a four-point plan to mitigate the impact.

The package consists of:

• A cut in official interest rates to 0.25%. The Bank last cut interest rates in March 2009 in a bid to cushion the UK economy from the global financial crisis

• Plans to pump an additional £60bn in electronic cash into the economy to buy government bonds, extending the existing quantitative easing (QE) programme to £435bn in total

• Another £10bn in electronic cash will be created to buy corporate bonds from firms “making a material contribution to the UK economy”

• A new scheme to provide as much as £100bn of new funding to banks to help them pass on the base rate cut to the real economy. Under this new “term funding scheme” (TFS) the Bank will create new money to provide loans to banks at interest rates close to the base rate of 0.25%

The Bank’s package of measures follows early economic indicators that confidence among businesses and households slumped in the wake of the June referendum and that a slowdown in spending threatens to tip the UK into recession. Business surveys this week suggested all parts of the economy were affected by a drop in demand following the vote to leave the EU.

UK interest rates
UK interest rates.

The Bank’s intervention to shore up confidence with this new package was welcomed by the chancellor, Philip Hammond.

He said in a statement: “The vote to leave the EU has created a period of uncertainty, which will be followed by a period of adjustment as the shape of our new relationship with the EU becomes clear and the economy responds to that.

“It’s right that monetary policy is used to support the economy through this period of adjustment.”

Hammond said the government and the Bank had the tools needed to support the economy.

Echoing that, the Bank’s monetary policy committee (MPC), chaired by the Bank’s governor, Mark Carney, also sought to reassure financial markets that there would be more easing to come this year.

Minutes from the MPC’s meeting said that if economic news proved consistent with the Bank’s latest forecasts then “a majority of members expected to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.”

“The MPC currently judged this bound to be close to, but a little above, zero,” the minutes added.

The minutes also showed the policymakers were not unanimous on the whole package. All nine members backed the new TFS scheme and the rate cut. The additional QE was backed by six committee members but opposed by Kristin Forbes, Ian McCafferty and Martin Weale. Forbes also voted against the other eight members on the plan to buy corporate bonds, given she was “particularly concerned about excessive stimulus at this stage”.

The Bank predicted there would be virtually no growth in the economy in the second half of this year and cut the outlook for the coming two years in its quarterly inflation report published alongside the rate decision.

Growth this year was forecast at 2%, unchanged from May’s outlook after a much stronger than expected second-quarter growth figure made up for a slowdown after the EU referendum. For 2017, the Bank’s growth forecast was cut to 0.8% from the 2.3% predicted in May. For 2018 it was cut from 2.3% to 1.8%.

That cumulative downgrade to growth prospects was the biggest between inflation reports since they were launched in 1993.

The interest rate decision was largely as expected among City analysts. In a Reuters poll of 49 economists published last week, all but three expected the Bank to cut at least 25 basis points to 0.25%. It is a stark contrast to expectations before the vote to leave the EU, when the next move in interest rates was seen as likely to be upwards.

Powered by Guardian.co.ukThis article was written by Katie Allen, for theguardian.com on Thursday 4th August 2016 12.05 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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