Bank of England cuts rates for first time since 2009, restarts bond purchases

The Bank of England cut interest rates for the first time since 2009 on Thursday (Aug 4).
The Bank of England cut interest rates for the first time since 2009 on Thursday (Aug 4).PHOTO: REUTERS

LONDON (REUTERS) - The Bank of England cut interest rates for the first time since 2009 on Thursday and said it would buy 60 billion pounds of government debt to ease the blow from Britain's June 23 vote to leave the European Union.

The central bank said it expected the economy to stagnate for the rest of 2016 and suffer weak growth throughout next year, and lowered its main lending rate to a record-low 0.25 per cent from 0.5 per cent, in line with market expectations.

But it also launched two new schemes, one to buy £10 billion (S$17.87 billion) of high-grade corporate bonds and another - potentially worth up to £100 billion - to ensure banks keep lending even after the cut in interest rates.

Most Monetary Policy Committee members also expected to cut Bank Rate again this year to a rate "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.

Policymakers were not completely united on how to respond. The cut in Bank Rate and the measure intended to ensure banks passed it on to consumers - known as the Term Funding Scheme (TFS) - gained unanimous support.

While many business surveys show Britain's economy has slowed sharply and may even be entering recession, it is too soon for official data on how the EU vote is affecting output.

The BoE left its forecast for growth this year steady at 2.0 per cent, as the economy expanded faster in the first half of 2016 than it had expected in May.

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 in growth from one Inflation Report to the next, exceeding what was seen in the financial crisis. The growth outlook for 2018 was cut to 1.8 per cent.

The BoE also revised up its inflation forecasts sharply, due to the big fall in sterling since the financial crisis, predicting it will hit 2.4 percent in 2018 and 2019. The MPC said the costs of trying to bring it back to its 2 percent target in the immediate future would exceed the benefit.