BoE cuts rates for first time in seven years
The Bank of England (BoE) has cut interest rates for the first time in more than seven years as it has slashed its growth forecasts, following the UK’s decision to leave the EU.
As widely expected, the BoE has cut interest rates today by 0.25% to just 0.25%, while it unveiled a package of measures designed to prevent a recession, in response to concerns that ‘Brexit’ has further weakened an already slowing UK economy.
The BoE has boosted its quantitative easing programme by £60bn in an attempt to stimulate the economy, as it now expects growth of just 0.8% next year, down from 2.3% in its May forecasts.
In regards to inflation, the BoE now believes prices will be rising by more than 2% in 2018, as the weak pound pushes up the cost of imported goods.
The BoE will also start buying £10bn of corporate bonds with newly created money.
In addition, it has launched a new “term funding scheme” (TFS) to provide as much as £100bn of new funding to banks to help them pass on the base rate cut to the real economy.
Today’s move shows an attempt to protect the economy from a downturn by easing monetary policy.
The chancellor, Philip Hammond, has welcomed the measures, and approved the increase to the Quantitative Easing scheme.
“I welcome the decision of the MPC today. The vote to leave EU has created uncertainty which will be followed by a period of adjustment,” Hammond said.
According to Anthony Doyle, investment director of Retail Fixed Interest at M&G, today’s stimulus package highlights the shift in the Bank of England’s approach to managing the economy.
Although there is currently no statistical evidence that the labour market is deteriorating or that inflation is a problem, the MPC has decided to act “early, decisively and in size” in order to limit the damage that a contraction in business investment and household consumption could have on the UK economy, Doyle said.
“[W]e expect that the BoE will enter into “wait-and-see” mode to allow today’s actions to be felt throughout the economy. However, Governor Carney has proven himself to be a dovish central banker and should the economic data weaken in the months ahead, it is likely that he will advocate a range of further monetary policy easing measures including another potential interest rate cut,” he said.
Schroders’ senior economist Azad Zangana said the asset manager expects a further cut in interest rates to 0.1% for November.