Others measures announced include a new “Term Funding Scheme” created to ensure that banks pass the reduced interest on to their customers, the “purchase of £10 billion of United Kingdom corporate bonds; and an expansion of the asset purchase scheme for United Kingdom government bonds of £60 billion, taking the total stock of these asset purchases up to £435 billion”.
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The bank’s Monetary Policy Committee also announced it will start a £10 billion corporate bond buying program.
Carney is hoping the new stimulus will give people confidence that the Bank of England is ready to take big steps to keep the U.K.’s economy healthy.
The measures seemed to exceed the expectations of investors.
But they are unlikely to address the economy’s fundamental concerns. 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. That could take years.
Carney said uncertainty from the Brexit vote will mean less demand, so businesses will cut their output reducing GDP growth and putting people out of work: “The combination of these demand and supply factors means that cumulative GDPgrowth is expected to be 2.5 percent lower by the end of the forecast period than was the case in May”. The contract jumped $1.10 on Thursday to close at $41.93. “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”.
And there may be more in the coming months.
The British pound traded at $1.3325, keeping some distance from its three-decade low of $1.2798 hit nearly a month ago, although currency markets may be somewhat ambivalent over how to react to the BoE decision – buy sterling if the BoE cuts, sell if it doesn’t, or vice versa?
Markets appeared to be surprised by the scale of the stimulus package unveiled Thursday – the pound dropped 1.4% to $1.31, while the FTSE 100 index of leading stocks gained 1.5%.
IHS Markit said on Wednesday its purchasing managers’ index of services, which makes up about 80% of the United Kingdom economy, fell to the weakest since 2009, the height of the global financial crisis in July. The bank also published fresh forecasts for inflation and economic growth.
Aberdeen Asset Management Chief Economist Lucy O’Carroll said the bank had to act, “more for the sake of its own reputation than the economic benefits”. Mr. Broadbent said he doesn’t favor it either.
But this will hardly be straightforward. The BOE also said it will begin a new Term Funding Scheme, under which it will lend to banks for up to four years to help boost the impact of the rate reduction on the economy.
“The overall package is broad-based – nearly a “kitchen sink” approach – and should mitigate the negative impact on banks from ultra-low interest rates”.
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The BoE left its forecast for growth this year steady at 2.0 percent, as the economy expanded faster in the first half of 2016 than it had expected in May. That compared with prior predictions of 2.3 percent for both 2017 and 2018. “Whether these measures are appropriate, only time will tell”.
