The Bank of England has cut interest rates for the first time in seven years and announced a package of monetary stimulus measures aimed at limiting the negative economic impact of Britain’s vote to leave the European Union. The Bank’s monetary policy committee voted unanimously to cut interest rates to 0.25 per cent, signalling that it will cut them further if necessary.
The committee said the outlook for economic growth had worsened since the referendum and Bank of England governor Mark Carney said he expected unemployment to rise over the next two years. Mr Carney said, however, that although there would be little growth in the second half of this year, he believed the monetary policy measures would ensure that Britain is likely to avoid a recession.
“If we hadn’t taken the steps we have taken, output would be lower and unemployment would be lower. We would have achieved a poor balance in returning inflation to target,” he said.
“With all forecasts there are risks on either side. We have in actions we have taken, through multiple channels, we have improved the economic outcome for this country. There will be less unemployment.”
Supply shock
Describing the Brexit vote as “a very identifiable supply shock”, Mr Carney said the measures announced on Thursday were designed to prevent that shock from precipitating a downturn.
“This is a response which will make this process of negotiations, transition, and ultimately Brexit, more likely to be a success,” he said.
“There is a clear case for stimulus and stimulus now for when the economy really needs it. This is about cushioning the shock and ultimately making this a success.”
The Bank will create an extra £60 billion to buy government bonds, extending its quantitative easing programme to £435 billion; it will buy up to £10 billion in corporate bonds to help companies generate economic activity; and make up to £100 billion in extra funding available to banks, to ensure that the benefit of the rate cut is passed on to borrowers.
Welcoming the Bank’s decision, chancellor of the exchequer Philip Hammond suggested that the government could also take further action to mitigate the impact of the Brexit vote.
“The vote to leave the EU has created a period of uncertainty, which will be followed by a period of adjustment as the shape of our new relationship with the EU becomes clear and the economy responds to that,” he said.
“As recent figures on jobs and growth have shown, we enter this period of adjustment from a position of economic strength. And the Governor and I have the tools we need to support the economy as we begin this new chapter and address the challenges ahead.”
Economic policy reset
The chancellor last month signalled a “reset” in Britain’s economic policy, which could see a shift away from the fiscal austerity pursued by his predecessor George Osborne. Mr Hammond has already abandoned a target of eliminating the budget deficit by 2020 and he is under pressure to cut taxes and increase spending on infrastructure projects in an attempt to stimulate the economy.
The pound fell sharply following the Bank’s announcement and British government bond yields fell to a 10-year low but the FTSE100 jumped by 1 per cent.
