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Bank of England cuts interest rate to record low

ENGLAND: The Bank of England on Thursday (Aug 4) slashed interest rates to a record low 0.25 per cent and announced a vast stimulus package to combat economic fallout from Britain’s looming EU exit.



Friday 5 August 2016, 10:13AM

Bank of England policymakers voted unanimously to reduce its key interest rate by a quarter-point from 0.50 per cent. Photo: AFP
Bank of England policymakers voted unanimously to reduce its key interest rate by a quarter-point from 0.50 per cent. Photo: AFP

Policymakers voted unanimously to reduce rates by a quarter-point, the bank said in a statement after its latest meeting, cutting borrowing costs for the first time in more than seven years.

The BoE expects to trim rates again later this year to just above zero, it signalled in a statement after its monetary policy meeting.

The central bank also delivered a £170-billion (B7.785 trillion) stimulus package, which it added could be expanded further.

And in gloomy news, the institution axed economic forecasts for 2017 and 2018 following the June 23 Brexit referendum – in its biggest GDP forecast downgrade on record.

As part of the stimulus package, the BoE’s Monetary Policy Committee also agreed to re-activate its quantitative easing (QE) bond-buying scheme, lifting it by £60 billion to £435 billion in the first increase since 2012.

Thursday meanwhile marked the first rate reduction since March 2009, when the bank cut to the previous historic low of 0.5% – and launched the radical QE policy to stimulate lending and growth during the global financial crisis.

Unusual’ situation

“It’s an unusual situation, it is a very large identifiable supply shock,” said BoE governor Mark Carney, in reference to the economic impact of Britain's EU departure, which is not expected for at least two years.

“The economic outlook has changed markedly… and (this is) consistent with the risks which the MPC saw before the vote.

“We’re living through a time of considerable uncertainty.”

The BoE will also buy £10 billion of corporate debt, while it also unveiled a new scheme worth up to £100 billion to encourage banks to lend to households and businesses. That took the total stimulus to as much as £170 billion.

“At its meeting… the MPC voted for a package of measures designed to provide additional support to growth and to achieve a sustainable return of inflation to the (2%) target,” the bank said.

Stocks up, pound down

Thursday’s news sent London's FTSE 100 shares index 1.6% higher by close, while sterling dived against the dollar and the euro.

Ocean Marina Pattaya Boat Show 2016

“Today’s announcement represents a significant policy loosening and underlines the bank’s commitment to do all it can to support economic and financial market confidence,” said Adam Chester, head of economics at Lloyds Bank Commercial Banking.

Michael Hewson, Chief Market Analyst CMC Markets UK, said Carney had “wielded the sledgehammer”, while Scotiabank praised the policy measures as “effective”, but added “that GDP growth could still disappoint.”

Barclays, meanwhile, said that the low interest rates would be passed onto consumers, promising a mortgage rate cut of 0.25%.

The BoE maintained its 2% economic growth forecast for 2016.

However, it slashed the growth outlook to 0.8% in 2017 and 1.8% in 2018. That compared with prior predictions of 2.3% for both 2017 and 2018.

“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 bank said.

And it warned: “Recent surveys of business activity, confidence and optimism suggest that the United Kingdom is likely to see little growth in GDP in the second half of this year.”

New British finance minister Philip Hammond welcomed the BoE announcement.

Support for post-Brexit economy

“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,” Hammond said.

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

Conservative Prime Minister Theresa May has already indicated London will not be rushed into EU exit talks – and will most likely will begin the negotiations early next year.

The BoE had flagged last month that it would likely cut rates in August in response to the Brexit vote, which had sent markets tumbling and the pound slumping in its aftermath.



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