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Bank of England cuts rate
Mark Carney did what was expected of him on Thursday, and then some, by cutting the Bank of England’s benchmark lending rate and promising to plow tens of billions of additional dollars into the country’s financial system.
“The bank continues to stand ready to take whatever action is needed to achieve its objectives for monetary and financial stability as the U.K. adjusts to new realities, and moves forward to seize new opportunities, outside the EU,” bank governor Carney told reporters in London following the BoE announcement.
“By acting early and comprehensively,” he said, monetary policymakers can “reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments” in the economy.
Carney and his colleagues met private-sector forecasts for a quarter-per cent cut in the key borrowing level, taking it to 0.25 per cent — the first drop since the 2009 financial crisis and marking a historic low for the country’s trendsetting rate. The bank said the lending rate could fall even lower this year, but ruled out moving into negative territory.
The former head of the Bank of Canada, who joined the BoE in 2013, also announced an “exceptional” stimulus package valued at 170 billion pounds (US$223 billion). This includes another 60 billion pounds in purchases of U.K. government bonds, taking the existing Asset Purchase Facility to 435 billion pounds, along with a new plan to buy up to 10 billion pounds in corporate bonds. The combined program goes further than previous efforts and exceeds what many economists and market players had anticipated.
As well as the much larger buying effort, the BoE plans to loan private banks as much as 100 billion pounds in a move to ensure that lenders have enough liquidity to continue funding households and businesses in the fallout from the June 23 referendum that showed voters narrowly in favour of the U.K. exiting the European Union — a move that could lead the country into recession.
“We took these steps because the economic outlook has changed markedly,” Carney said.
But the effectiveness of Thursday’s action plans is still in question, as is the country’s economic outlook. Indeed, much more work lies ahead for Carney, who will remain central bank governor until at least 2018.
“Indicators have all fallen sharply, in most cases to levels last seen in the financial crisis, and in some cases to all-time lows,” Carney said. “We are seeing these risks manifest in a wide variety of indicators — indicators which in many cases are better indicators of what is actually happening in the economy, rather than what we call hard data — so there is a clear case for stimulus, and stimulus now, in order to have an effect when the economy really needs it.”
The BoE, however, is not yet at the point of accepting that a recession is inevitable — even as it acknowledges business investment and consumer spending, including house purchases, will likely weaken both this year and in 2017. Still, policy-makers insist growth will reach 0.8 per cent next year, down from the previous estimate of 2.3 per cent, while the forecast for 2018 has been lowered to 1.8 per cent — also down from an earlier forecast of 2.3 per cent.
But according to the National Institute of Economic and Social Research, based in London, it’s likely the U.K. will experience a downturn over the next 18 months. The independent think-tank estimates the economy could be begin to contract — by about 0.2 per cent — in the third quarter of 2016.
“This cut in interest rates was widely expected, but it is really a token gesture which is unlikely to help the economy much in the current situation,” said Andrew Sentance, a senior economic adviser at PwC and one-time member of the BoE’s decision-making counsel.
“Savings rates are already nearzero and borrowing costs for business and homeowners are extremely low,” Sentance told Reuters.
There is a clear case for stimulus, and stimulus now, in order to have an effect when the economy really needs it.