Interest rates were cut to a record low of 0.25%, which should reduce mortgage repayments for many homeowners and make it cheaper for companies to borrow.
Advertisement
While the move had been widely tipped, BoE policymakers also unveiled an emergency package worth up to £170 billion, including £60 billion for more in bond-buying, or quantitative easing (QE).
New measures include a new quantitative easing programme which involves buying up to £10 billion of corporate bonds and buying an extra £60 billlion of United Kingdom government bonds, taking its total asset purchases to £435 billion, using the central bank’s reserves.
“By acting early and comprehensively, the (Bank) can reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments in the United Kingdom economy”, BoE Governor Mark Carney told a news conference.
Some may see action by the central bank as another confidence-building move to ease worries in the markets and among the general public about credit drying up.
By cutting rates to the lowest in its 322-year history, the BoE joins the Bank of Japan and the Reserve Bank of Australia, which both undertook unprecedented stimulus in the past week. Businesses in particular are anxious about whether to make investments or hire in Britain without knowing what the country’s trade relationship with the European Union will be. “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”.
The blue-chip index sat 1.3% below its record close on July 20. “We need stronger direction from the government”, he says. “By acting early and comprehensively, the (Bank of England) can reduce uncertainty, bolster confidence, blunt the slowdown, and support the necessary adjustments in the United Kingdom economy”.
That slightly more positive tone may linger as a backdrop for the global economy in the coming week, with growth data due for the euro zone, Germany and Italy, along with key releases on inflation, industrial production and retail sales in China. The Bank of England is expected to cut interest rates close to zero and possibly inject billions in new money into the economy to help it endure the shock of the vote to leave the European Union. Carney insisted that subzero interest rates were not being considered.
Sterling fell as much as 1.6 percent against the dollar following the announcement, while British government bond yields hit record lows and the main share index rose by 1.6 percent.
London’sFTSE 100 index reversed earlier losses to trade up 1.6% after the decision, with financial shares climbing steadily.
Lucy O’Carroll, chief economist at Aberdeen Asset Management, said the central bank had to act, “more for the sake of its own reputation than the economic benefits”.
In a nutshell: “Over to you, Mr. Hammond”, she said.
But this will hardly be straightforward.
She said: “The view of the IoD nationally is that interest rate cuts alone are not enough to bridge the confidence gap”.
The Bank of England said unemployment in Britain will rise by 250,000, house prices will fall and inflation will go up. Having cut its 2017 growth predictions to 0.8pc now from 2.3pc in May, and the 2018 forecast to 1.8pc from 2.3pc, the BoE is sending a clear signal to the markets in order to stave off possible gains in speculative transactions.
Advertisement
The governor said that banks have “no excuse” not to pass on the lower borrowing costs to customers and will be charged a penalty if they fail to do so.
