The share markets gained despite warnings from BoE governor Mark Carney of a further likely downturn in the United Kingdom economy, and despite relatively weak corporate earnings and subdued economic growth indicators in most parts of the world.
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The BoE’s quarter point rate cut to a record low 0.25 percent boosted shares in Europe while sending already low global bond yields even further down with British yields hitting record lows as gilt prices rose.
The Monetary Policy Committee discussed the appropriate amount of new easing to add to support an economy rattled by Brexit, he said in a briefing at the BOE in London on Friday. The inflation rate is pegged at 0.8% this year, 1.9% next year and 2.4% in 2018, the bank said.
On Thursday, as was widely expected, Britain’s central bank cut interest rates to a historic low of 0.25% in response to worsening survey data following the country’s decision to leave the European Union.
“There is a clear case for stimulus, and stimulus now”, Mark J. Carney, the bank’s governor, said at a news conference on Thursday.
But Broadbent said the BoE would not use it as a back-door way to introduce negative interest rates – something some analysts have speculated about, given Carney’s firm opposition to cutting the main Bank Rate below zero.
The package came as the Bank announced it has cut its GDP projection next year from 2.2 per cent to 0.8 per cent.
“As interest rates are close to zero”, the bank said, “it is likely to be hard for some banks and building societies to reduce deposit rates much further, which in turn might limit their ability to cut their lending rates”.
The corporate bond purchase was also approved with a cap of 10 billion pounds.
The central bank will fund this £100 billion via balance sheet expansion, which means it is a bigger quantitative easing tool.
The unexpected Brexit vote is what has made this all necessary by causing the economy to slow fast. “Although there had been some expectation of QE, the BoE went big”, HSBC economist Simon Wells said. The British central bank also unveiled a raft of stimulus measures that include resuming a bond-buying program to pump money into the economy and offering cheap loans to banks.
It has reduced its growth prediction for 2017 from the 2.3% it was expecting in May to 0.8%.
The labor market, however, remains healthy and will probably continue to support economic growth for the remainder of this year. These institutions will be allowed to borrow at close to Bank rate for four years. They will charge a penalty rate to banks that reduce net lending.
The paper adds it is one of the clearest signs from a major Wall Street institution that is preparing specific measures following the landmark vote.
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“There are limits to what monetary policy, indeed any demand-management policy can do – conventional fiscal policy as well – to offset what is a structural effect on the economy”.
