Bank of England (BoE) has cut interest rates, releasing billions of pounds of stimulus to soothe the economy hit by the recent vote to leave the European Union. It reduced interest rates by 2 basis points to a record-low 0.25 per cent. The cut is the first since 2009, and was accompanied by a pledge to buy 60 billion pounds of government bonds with newly created money over the next six months, and two new stimulus schemes.
BoE said most policy makers expected to cut the main interest rate to even closer to zero later this year, and sharply downgraded its outlook for growth next year. BoE Governor Mark Carney said, "By acting early and comprehensively, the (Bank) can reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments in the UK economy." He said he had unveiled an "exceptional package of measures" because the economic outlook had changed markedly following the Brexit vote. Sterling fell as much as 1.6 per cent against the dollar following the announcement, while British government bond yields hit record lows and the main share index rose by 1.6 per cent.
BoE expects the economy to stagnate for the rest of 2016 and suffer weak growth next year. With the cutting of rates to the lowest in its history, the bank now joins the rank of the Bank of Japan and the Reserve Bank of Australia, which both undertook unprecedented stimulus in the past week. 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."
Carney said the BoE had scope to do more stimulus in the form of rate cuts and quantitative easing, but ruled out negative interest rates, and rejected "flights of fancy" such as handing out 'helicopter money' with no strings attached. He said commercial banks had "no excuse" not to pass on the BoE's rate cut to their customers. The Bank's policy makers were not completely united on how to respond to the fallout from Brexit.
Three policymakers have, however, opposed raising the target for quantitative easing government bond purchases to 435 billion pounds from the 375 billion total reached in late 2012. Kristin Forbes, Ian McCafferty and Martin Weale expressed their displeasure with the move.
The BoE left its forecast for growth this year steady at 2 per cent, as the economy expanded 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 per cent from a previous estimate of 2.3 per cent, the biggest downgrade in growth from one inflation report to the next, exceeding what was seen in the financial crisis. HSBC economist Simon Wells said, "Although there had been some expectation of QE, the BoE went big. The question is whether all this...will have a significant impact on the real economy. Yields are already very low and uncertainty is the biggest obstacle to growth."
