BOE unveils 'exceptional' stimulus package

Bank of England governor Mark Carney said that since the Brexit vote, "indicators have all fallen sharply, in most cases to levels last seen in the financial crisis and, in some cases, to all-time lows".
Bank of England governor Mark Carney said that since the Brexit vote, "indicators have all fallen sharply, in most cases to levels last seen in the financial crisis and, in some cases, to all-time lows".PHOTO: REUTERS

UK central bank announces first interest rate cut in seven years as Brexit changes outlook

LONDON • Bank of England (BOE) governor Mark Carney yesterday unveiled an "exceptional" stimulus package, including the central bank's first interest rate cut in seven years, as policymakers slashed growth forecasts by the most ever after Britain's decision to leave the European Union.

Officials led by the governor voted unanimously to reduce the benchmark by 25 basis points to a record low of 0.25 per cent. They split over other elements of the stimulus, which expands the BOE's balance sheet by £170 billion (S$300 billion) with purchases of gilts and corporate bonds, and a lending programme for banks.

Mr Carney said he had unveiled an "exceptional package of measures" because the outlook had changed markedly following the Brexit vote. "Indicators have all fallen sharply, in most cases to levels last seen in the financial crisis and, in some cases, to all-time lows."

The central bank also said it expected the economy to stagnate for the rest of this year and suffer weak growth throughout next year.

Most Monetary Policy Committee (MPC) members also expected to cut the bank rate again this year to a level "close to, but a little above zero", if the economy performed as poorly as forecast.

"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.

  • KEY FIGURES

    0.25%

    New, record low benchmark rate after reduction of 25 basis points.

    0.8%

    BOE growth forecast for next year.

    1.8%

    BOE growth forecast for 2018.

    1.2%

    Drop in the pound against the US dollar (US$1.3169) at noon after the BOE announcement.

    £60b

    Government bonds to be bought by BOE over six months.

    £10b

    Corporate bonds to be bought by BOE in the next 18 months.

The pound slipped 1.2 per cent to US$1.3169 at 12.25pm (7.25pm Singapore time) after the announcement.

Mr Peter Frank, global head of Group-of-10 currency strategy at Banco Bilbao Vizcaya Argentaria, said: "The BOE clearly is willing to provide an array of stimulus policies because it thinks that the UK economy is going to face substantial headwinds from Brexit. I think the BOE and the government are keen to see a much weaker pound."

Dutch bank ING called the package of measures a "sledgehammer stimulus".

The BOE left its forecast for growth this year steady at 2 per cent, as the economy expanded faster in the first half of this year than it had expected. But 2017 brings a sharp downgrade to growth of just 0.8 per cent from a previous estimate of 2.3 per cent - the biggest downgrade from one Inflation Report to the next. The growth outlook for 2018 was cut to 1.8 per cent.

The BOE also revised up its inflation forecasts sharply, because of the big fall in the pound since the financial crisis, predicting it will hit 2.4 per cent in 2018 and 2019.

The MPC said the costs of trying to bring it back to its 2 per cent target in the immediate future would exceed the benefit.

The rate cut has forced Britain's biggest high-street lenders to review the rates on hundreds of savings and mortgage products, many of which were already at record lows.

HSBC, Lloyds Banking Group, Barclays, Royal Bank of Scotland and Santander UK, the British arm of Banco Santander, all told Reuters they would evaluate deposit and lending rates offered and inform affected customers of any changes in due course.

NEW REALITY

The decision to leave the European Union marks a regime change. In the coming years, the UK will redefine its openness to the movements of goods, services, people and capital. Some of the adjustments to this new reality may prove difficult, and many will take time, but the UK can handle change.

BOE GOVERNOR MARK CARNEY, at a news conference after the announcement on the interest rate cut.

The bank continues to stand ready to take whatever action is needed to achieve its objectives for monetary and financial stability as the UK adjusts to new realities, and moves forward to seize new opportunities, outside the EU.

The Monetary Policy Committee is determined that the stimulus the economy needs does not get diluted as it passes through the financial system.

Wall Street opened little changed after the announcement, as the recent set of strong data from the United States positioned investors in the wait-and-see mode for today's jobs report.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on August 05, 2016, with the headline 'BOE unveils 'exceptional' stimulus package'. Print Edition | Subscribe