Sun | Sep 24, 2017

UK central bank launches stimulus to soften Brexit shock

Published:Friday | August 5, 2016 | 8:00 AM
A London bus passes the Bank of England in London on Thursday, August 4, 2016. (AP Photo/Frank Augstein)

Britain's central bank moved to stem the economic fallout from the vote to leave the European Union, approving its first interest rate cut on Thursday since the global financial crisis as part of a broader stimulus package.

In a multipronged approach meant to jolt confidence back into a shocked economy, the Bank of England cut its key rate to 0.25 per cent from a previous record low of 0.5 per cent. It also agreed to pump an additional £60 billion (US$79 billion) of new money into the economy through the purchase of government bonds.

The bank furthermore said it will buy up to £10 billion of corporate bonds to make it easier for companies to borrow, and announced a programme of cheap loans for banks to make sure they can lend to people and businesses at low rates.

"This is the appropriate response to the economic conditions we find ourselves in," Bank of England Governor Mark Carney told a news conference.

The measures are meant to grease the gears of the economy by making borrowing easier and cheaper, but are unlikely to alone be able to keep the country from sliding into - or close to - recession, analysts say. The initial shock at the vote's outcome has seen business activity drop at the fastest pace since the depths of the financial crisis in 2008, according to surveys.

While lower borrowing rates will help households and companies, the cost of loans is not their primary concern right now, economists say. Businesses in particular are worried about whether to make investments or hire in the United Kingdom (UK) without knowing what the country's trade relationship with the EU will be. That could take years.

To reflect the grim reality, the Bank of England cuts its economic forecasts by the most in almost two decades, particularly for the period after 2016. While it still predicts 2.0 per cent growth this year, it slashed its forecast for next year to just 0.8 per cent from its May estimate of 2.3 per cent. For 2018, it slashed its forecast to 1.8 per cent from 2.3 per cent.

"We took these steps because the economic outlook has changed markedly" since the referendum, Carney said in a statement. "By acting early and comprehensively, the (Bank of England) can reduce uncertainty, bolster confidence, blunt the slowdown, and support the necessary adjustments in the UK economy."

Exceeding expectations

And there may be more in the coming months. All of the measures have scope for further action, including another cut to interest rates "close to, but a little above, zero" if incoming economic data proves broadly consistent with the Bank of England's new forecasts. Carney insisted that sub-zero interest rates were not being considered.

The measures seemed to exceed the expectations of investors. The value of the British pound fell sharply on the news, as lower rates tend to weigh on a currency. It was down 1.4 per cent at US$1.3136 by early afternoon in London, while stock markets rose, as the weaker currency will help many of the country's multinationals and exporters earn more money abroad.

Lucy O'Carroll, chief economist at Aberdeen Asset Management, described Carney as a "first responder" to the shock of Brexit, who delivered two messages to the new Treasury chief, Philip Hammond.

"Message one: it is up to the government to implement a 'comprehensive productivity plan.' Furthermore, the bank has severely downgraded its expectations for business investment over the next couple of years," she said. "Message two: without an infrastructure investment plan ... the UK economy's growth performance in a post-Brexit world could be severely impaired.

"Over to you, Mr. Hammond," she said.

Hammond hinted that was possible, saying in a letter to Carney on Thursday that he was "prepared to take any necessary steps to support the economy and promote confidence".

- AP