The Bank of England on Thursday cut its key interest rate for the first time since the 2009 financial crisis and also said it will buy both government and corporate bonds in a fresh round of stimulus measures created to offset the economic fallout from Britain’s vote to exit the European Union.
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He commented that monetary policy cannot deal with structural issues directly, but can provide the appropriate policy to support the economy.
“Today is the day markets widely expect the Bank of England to cut interest rates to fresh lows of 0.25 per cent”, said economist Ana Thaker at trading firm PhillipCapital UK.
The MPC also voted by 8-1 to introduce a scheme to buy £10bn of high-grade corporate bonds. In that issue, Liam Halligan also warned against central bankers using Brexit as an excuse to print money and administer another dose of the cheap debt drug.
“This is the appropriate response to the economic conditions we find ourselves in”, the Bank of England’s governor, Mark Carney, told a news conference.
The Bank wrong-footed financial experts three weeks ago by leaving rates unchanged, but it said most of its policymakers were likely to support action in August as post-referendum uncertainty depressed the economy.
Eligible institutions will be able to borrow four-year central bank reserves for an initial period of 18 months at rates close to the Bank Rate.
The package was more robust than market participants had expected.
BAML says that the BoE should “kitchen sink it” and cut rates by 0.25%, add £50 billion in QE and ease credit further.
The financial market reaction was bullish for stocks.
London’s FTSE 100 index reversed earlier losses to trade up 1.4% after the decision, with financial shares climbing steadily.
Euro zone bond yields also fell.
“On the upside, service firms who export and those with a strong global footprint will look to make the most of opportunities brought by the fall in the pound against the dollar and euro, and continued investment from countries like China”. Futures augured gains on Wall Street, with Dow and S&P futures both up 0.2 percent.
The Bank’s Monetary Policy Committee (MPC) voted to cut interest rates to 0.25% from 0.5%, where they have been for seven years.
Policymakers were not completely united on how to respond. “Knowing all of this and the fact that the United Kingdom government have made a decision to wait.to formulate its fiscal response, in order to get a clearer picture of recent events and their effects on the United Kingdom economy, surely it would make more sense for the Bank of England to do the same”. A recession might be under way before fiscal stimulus begins working its way through the economy.
Investors continue to wonder whether central bank intervention will be successful in boosting growth.
All but two of 52 economists in a Bloomberg survey predicted a cut in rates that would be the first since March 2009.
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“Message one: it is up to the government to implement a ‘comprehensive productivity plan.’ Furthermore, the Bank has severely downgraded its expectations for business investment over the next couple of years”, she said.
