“Today’s interest rate cut was therefore widely anticipated, although the package of additional measures to support the economy is more significant in scope than what markets had priced in”.
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London’s FTSE 100 index, which had been wobbling beforehand, surged and closed 1.6 per cent higher.
To reflect the grim reality, the Bank of England cuts its economic forecasts by the most in nearly two decades, particularly for the period after 2016.
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? While it still predicts 2 percent growth this year, it slashed its forecast for next year to just 0.8 percent from its May estimate of 2.3 percent. The dollar index, which measures the greenback’s value against a basket of six major currencies, was last trading at 95.719, up from Tuesday’s five-week low of 95.003.
Quincy Krosby, market strategist at Prudential Financial, said investors were playing it safe as they waited for the Labour Department’s July employment report.
The decision to cut interest rates to 0.25% was approved unanimously by all nine members of the MPC and is the first change in interest rates since March 2009.
That cumulative downgrade to growth prospects was the biggest between inflation reports since they were launched in 1993. 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.
Back in London, Royal Bank of Scotland was the biggest faller.
Sterling was down 1.59 percent at $1.3110 and on track for the largest one-day fall against the dollar in a month.
STIMULUS IN THE UK: The Bank of England cut interest rates to new lows and unveiled a raft of stimulus measures that include resuming a bond-buying stimulus program to pump money into the economy and launching a program of cheap lending to banks.
London dipped 0.1 percent in tentative morning deals as investors waited on whether the BoE will unveil a quarter-point reduction to combat the economic impact of Britain’s shock European Union exit vote. “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”. While the pace of hiring and economic growth slowed in the first half of the year, consumers could spend more in the months to come. Carney, however, did appear to rule out pushing rates into negative territory.
In a nutshell: “Over to you, Mr. Hammond”, she said. It previously predicted growth of 2.3% in 2017 and 2018.
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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”. “It’s safe to say former Chancellor George Osborne’s many years of austerity policies are set to be dramatically reversed”.
