LONDON – The Bank of England has unveiled a series of stimulus measures, including its first interest rate cut since the global financial crisis, as it tries to jumpstart an economy shocked by Britain’s vote to leave the European Union.
The central bank cut its key rate to 0.25 per cent from a previous record low of 0.5 per cent. It is also expanding its bond-buying stimulus program to pump an additional 60 billion pounds ($79 billion) in new money into the economy. And it will buy up to 10 billion pounds in U.K. corporate bonds — or bonds sold by companies to finance their activities.
The bank suggested that more stimulus action was possible if the incoming economic data proves broadly consistent with the new forecasts the Bank of England compiled Thursday.
“A majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the (committee’s) forthcoming meetings during the course of the year,” policymakers said in a statement. It estimated that lower bound to be “close to, but a little above, zero.”
The bank also slashed its growth forecasts from next year onwards, underscoring the contraction underway. It predicted the economy would grow only 0.8 per cent next year, compared with the 2.3 per cent it had previously predicted. The cut its forecast for 2018 to 1.8 per cent from 2.3 per cent.
Thursday’s decision underscored the bank’s concern about an economy that has taken a sharp turn lower since the vote to leave the EU. Early indicators since the June 23 vote suggest that the economy is contracting at its sharpest rate since 2009.
The stimulus measures are a pre-emptive strike to bolster confidence after the first weeks of shock over the vote’s outcome. The value of the British pound fell sharply on the news, as lower rates tend to weigh on a currency. It was down 1.1 per cent at $1.3173 by early afternoon in London, while stock markets rose.
Aberdeen Asset Management Chief Economist Lucy O’Carroll said the bank had to act, “more for the sake of its own reputation than the economic benefits.” What will really matter is whether the government will also offer a fiscal boost in the autumn, she said.
“Monetary policy can’t do much more on its own,” she said.