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WhyItMatters

BOE stimulus: Much at stake for UK economy

It was a move that likely had "Remain" voters feeling vindicated. The Bank of England (BOE) last Thursday launched an exceptional stimulus package, including its first interest rate cut in seven years.

As many in the Remain camp - those who wanted to stay in the European Union - warned, it looks like Britain's economy will slump sharply post-Brexit.

The central bank left its forecast for growth this year steady at 2 per cent, even as it predicted virtually no growth in the economy in the second half of this year. It also slashed the growth outlook for next year to just 0.8 per cent from 2.3 per cent, the biggest-ever downgrade from one inflation report to the next.

To stop Britain from tipping into a recession, the BOE cut interest rates to a record low of 0.25 per cent and said it will pump £70 billion (S$123 billion) into the economy by buying bonds issued by the British government and about 150 firms. A new £100 billion lending scheme for banks will aim to cushion a drop in profit margins resulting from low interest rates.

Even with such bold action, details of the BOE's move paint a dire picture of Britain's economy post-Brexit. The Guardian said that BOE governor Mark Carney personally called bank bosses to make it clear the central bank wants to see the full benefits of its anti-recession strategy felt by households and businesses. And even with the stimulus measures, he said Britain will likely suffer 250,000 job losses.

Still, stock markets rejoiced over the BOE's action, with bourses from London to Singapore rising.

Market punters will likely have more to cheer. British Chancellor Philip Hammond has hinted that the Treasury will unveil fiscal stimulus measures later this year, saying he would take "any necessary steps to support the economy and promote confidence".

This promise reflects the fact that there is still much at stake for the British economy as the country negotiates Brexit terms. Any outcome deemed unfavourable to Britain will likely hurt the economy even more, making the BOE's bold actions just a temporary balm.

A version of this article appeared in the print edition of The Straits Times on August 08, 2016, with the headline 'Much at stake for UK economy'. Print Edition | Subscribe