The Bank of England has cut interest rates from 0.5 per cent to 0.25 per cent after a record seven years.
Advertisement
The stimulus measures have “improved the economic prospects of the country”, BOE Gov. Mark Carney said in a press conference following the decision. The lengthy process means that the fog of uncertainty that has settled over households and businesses is unlikely to dissipate any time soon, dampening spending and investment.
The FTSE 250, which is home to a larger proportion of companies that are truly domestically focused, also rallied on the day, with companies taking comfort from the prospect of a cash injection from the Bank of England’s new corporate bond buying programme.
The MPC said it could adjust the terms and length of the scheme, which is funded by central bank reserves and that the value of lending will be determined by usage of the scheme and could reach around 100 billion pounds.
The bank also unveiled a package of measures to boost a sharply slowing economy after the European Union referendum vote, with the bank revealing its biggest growth downgrade since quarterly inflation report records began.
European shares rose, government bond yields fell and sterling weakened against the dollar and euro on Thursday after the Bank of England cut interest rates and restarted bond purchases in a bid to ease the economic hit from June’s vote to leave the EU. “If he really wanted to signal a clear and aggressive pre-emptive strike to stave off a drop in consumer confidence, growth forecasts and PMI’s, he’d cut rates down to 0.1%”. German 10-year yields, the bloc’s benchmark, were down 4 bps at minus 0.14 percent, according to Tradeweb.
The volatility was particularly prominent immediately after Mark Carney’s speech at the Bank of England in which he confirmed that the Monetary Policy Committee had agreed to lower the base interest rate to an historic low of 0.25%.
Michael Hewson, Chief Market Analyst CMC Markets UK, said Carney had “wielded the sledgehammer”, while Scotiabank praised the policy measures as “effective”, but added “that GDP growth could still disappoint”. China’s CSI 300 index gained 0.2 per cent, and the Shanghai Composite advanced 0.1 per cent.
Carney said the BoE had scope to do more stimulus in the form of rate cuts and quantitative easing, but ruled out negative interest rates, and rejected “flights of fancy” such as handing out “helicopter money” with no strings attached.
The BoE left its forecast for growth this year steady at 2%, as the economy expanded faster in the first half of 2016 than it had expected in May.
Advertisement
New finance minister Philip Hammond, who replaced George Osborne last month, authorised the bond purchases and the TFS. Of course, it’s worth saying at this point that so far we’ve only had the initial reaction to the announcement and compared to the near 2% decline that followed in cable, the rebound off the lows has been more of a dead cat bounce than a signal that the pair has bottomed. We could therefore see further pressure on the 1.31 support level in the near-term and if this is broken, the pair could be headed back towards the post-Brexit lows around 1.28.
