The Bank of England (BOE) has cut on Thursday rates for the first time in over seven years, slashed growth forecasts and launched a new monetary policy weapon in the battle to stop a post-Brexit slump in the U.K.
Mark Carney, the governor of the Bank of England, pledged that the bank would “stand ready to act in exceptional circumstances” as he made one of the most dramatic announcements of his tenure. The new monetary policy should “help make Brexit a success,” he told reporters.
“Lower interest rates will be felt immediately in this economy.”
The central bank has made its biggest quarterly downgrade of growth forecasts, reducing expectations for 2017 growth from 2.3 percent to 0.8 percent, citing “substantial uncertainty” after the referendum on the U.K.’s membership of the European Union (EU) in June. The bank has made these forecasts since 1992.
Its rate-setting committee cut interest rates for the first time in nearly seven and a half years, from 0.5 percent to 0.25 percent, and signaled a further rate cut before the end of the year. This is likely to be “close to but a little above zero”, according to the committee’s minutes.
“I cannot see any scenario where I would consider negative interest rates,” Carney told CNBC at a press conference after the announcement. He also dismissed so-called helicopter money, where the population is effectively handed out money, as “flights of fancy”.
Carney, who had been criticized for his forecasts about how Brexit could negatively hit the U.K. ahead of the referendum, said that the “early indicators are consistent” with his warnings. He added that the big decisions on how to deal with the economic impact remain with the new Chancellor, Philip Hammond, and the rest of the U.K. government.
Sterling fell sharply against the dollar after the announcement and hit 1.3140 at around 12:30 p.m. London time. British gilt yields also hit record lows.
Negative interest rates, which have been employed by their counterparts elsewhere in Europe, have increasingly being mentioned as a possible policy option for the U.K.
During the fallout from the U.K.’s vote to leave the EU in June, there have been concerns about how much the bank can do to halt a slowdown, given that it has already gone through close to a decade of extraordinary monetary policy measures.
In an effort to stave off some of the potentially worse impacts of very low or negative interest rates, Carney announced a new Term Funding Scheme worth up to £100 billion ($132 billion) and the purchase of up to £10 billion in U.K. corporate bonds.
A £60 billion hike in the bank’s government bond-buying program, known as quantitative easing, to £435 billion was also announced.
The corporate bond-buying program is expected to be limited to firms making a material contribution to the U.K. economy.
The bank’s outlook for the post-referendum economy was notably gloomier, with predictions for unemployment to rise to 5.4 percent in the third quarter of 2017, higher than the 4.9 percent previously forecast, “lower real incomes in the UK”, and a “little” decline in house prices. Inflation is also now expected to rise faster than previously thought, and the bank forecast it would rise above its 2 percent target in the first quarter of 2018.
An immediate slowdown in GDP growth in the third quarter to 0.1 percent was forecast by the Bank, after a series of data points suggested that economic activity has dropped off and uncertainty over the future among businesses had grown since the referendum. The U.K. is expected to avoid a recession, according to the Bank projections, but the low forecast suggests that the Bank feared the country would sink into recession without the new package of monetary policy measures.
The weakness in sterling, which is now down 9 percent against a basket of currencies since the June vote, may help exports as well as raising the price of imports for U.K. consumers.
Source: CNBC
