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Why did the Bank of England cut interest rates?
A: Following its August meeting, the Monetary Policy Committee (MPC) of the Bank of England (BoE) announced some changes to policy, most notably a reduction in the bank interest rate from 0.5 per cent to 0.25 per cent, the first change since March 2009.
Clearly, the MPC felt it needed to be seen to be taking action following the economic uncertainty created by the EU referendum result. However, we think it is unlikely that these policy measures will have a significantly positive impact on activity. Indeed, the MPC is risking sending a signal that will have detrimental consequences for growth.
The contrary argument is that for the BoE to do nothing in the face of uncertainty would be unacceptable, and that such seeming indifference would also send the wrong signals. It could also be contended that the directly negative consequences of the new measures are unlikely to be substantial and, therefore, that they are worth instituting even if the positive impact turns out to be limited.
Even if you believe that Brexit will have a severe impact on the economy over the period ahead, it is hard to understand why that outlook would be changed materially by the latest policy package. For instance, if investment programmes are put on hold as a result of uncertainty, it is unlikely they will be reinitiated simply because interest rates are fractionally lower or the BoE is buying corporate debt. The article is for information purposes only and should not be interpreted as investment advice.