“Instead of policies created to fuel asset price bubbles and increase household debt, the Treasury and the Bank of England should cooperate to directly stimulate aggregate demand in the real economy”, the letter continued.
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In its quarterly inflation report, the Bank warned there would be “little growth” in the second half of the year, forecasting the economy to nearly flat-line at 0.1% in the third quarter. It predicted the economy would grow only 0.8 percent next year, compared with the 2.3 percent it had previously predicted.
“Following the United Kingdom’s vote to leave the European Union, the exchange rate has fallen and the outlook for growth in the short to medium term has weakened markedly”, the central bank said in its quarterly Inflation Report.
Another 2.3million are on variable rates tied to their lender’s standard rate – they could also see a drop, but it will depend on their bank. Moneyfacts.co.uk recently found that around 72% of current account deals do not offer an interest rate on credit balances, although some of these could offer other “perks” such as cashback. The BoE said it will finance the purchases with the issuance of central bank reserves.
The Bank is also planning to buy up to £10bn of corporate bonds in an attempt to drive down funding costs and get companies investing again.
Pensions and other investments are, of course, a long-term project so the long-term health of the economy is arguably the most important element to consider.
A weaker pound makes imported goods more expensive, which boosts inflation.
Banking sector stocks Lloyds and Royal Bank of Scotland pared gains after the Bank of England decision, with Lloyds ending 1 per cent lower, and mid-cap challenger bank CYBG fell 1.8 per cent.
The Bank predicts “little growth in GDP in the second half of the year”, and growth is now projected to slow to 0.1% in 2016 Q3.
The forecast for 2018 has been cut from 2.3% to 1.8%.
Better than expected private company employment data for July, released yesterday, point to a better than forecast jobs market, nevertheless, the monthly NFP figures remain highly anticipated.
“However, monetary policy can support the necessary adjustments of the United Kingdom economy during a period of heightened uncertainty That is why at its meeting yesterday, the NPC agreed an exceptional package of measures comprising, first a 25 basis point reduction in bank rate and 0.25%”. The additional QE was backed by six committee members but opposed by Kristin Forbes, Ian McCafferty and Martin Weale.
It would also buy up to £10bn of corporate bonds.
The next MPC meeting is on 3 November, after the BoE moved to only meeting eight times a year.
Before the referendum, there were warnings of a recession if there was a vote to leave the EU. “Savers have been in this situation for about seven years”, he said.
Carney said the UK’s central bank will do “whatever it takes” and that the effects of the lower interest rates will be felt immediately in the economy.
Treasury chief Chancellor Philip Hammond hinted that was possible, saying in a letter to Carney on Thursday that he was “prepared to take any necessary steps to support the economy and promote confidence”.
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He said that those plans would be set out in the Autumn Statement.
