BRACE FOR BREXIT
Bank of England makes moves to help cushion the impact,
The Bank of England (BOE) cut its key rate for the first time in more than seven years and will restart the printing presses as it ramps up defences against a Brexit-induced slump.
Officials, led by Governor Mark Carney, slashed their growth forecasts by the most ever and voted unanimously to reduce the benchmark by 25 basis points to a record-low 0.25 per cent. While saying they had scope to do more if needed, including taking the key rate close to zero, they also announced a plan to lend as much as £100 billion ($170.8 billion Canadian) to banks to ensure the measures reach the real economy.
In addition, the Monetary Policy Committee (MPC) will buy £60 billion of government bonds over six months and as much as £10 billion of corporate bonds in the next 18 months, though there was disagreement among the nine members about whether quantitative easing was warranted at this stage.
In total, the balance sheet could expand by £170 billion.
“The package contains a number of mutually reinforcing elements, all of which have scope for further action,” officials said in a statement. Should their forecast prove correct, “a majority of members expect to support a further cut in bank rate to its effective lower bound” later this year.
The rate reduction marks the first change in the benchmark since March 2009, at the height of the financial crisis. Officials said they now judge the lower bound to be “close to, but a little above, zero.”
The easing arrives amid mounting signs quitting the European Union is having an adverse impact on the U.K. economy. While the full fallout hasn’t yet shown up in official data, initial reports show confidence has slumped and industry surveys have weakened.
The central bank cut its growth forecast for next year to 0.8 per cent from 2.3 per cent and lowered its 2018 prediction to 1.8 per cent from 2.3 per cent. Weaker investment and consumption were the main drivers, with the BOE seeing business investment falling this year and next, and housing investment dropping in 2017.
“Recent surveys of business activity, confidence and optimism suggest that the U.K. is likely to see little growth in GDP in the second half of this year,” the BOE said.
This year’s growth forecast was left unchanged at 2 per cent. For the current quarter, the BOE predicts an expansion of just 0.1 per cent.
While the referendum result has darkened the growth outlook, it’s also lowered the pound, pushing up costs for importers and potentially stoking inflationary pressures.
That prompted the central bank to revise up its inflation forecasts, with the projections showing the rate will reach its 2 per cent target in the final quarter of next year. In the last set of predictions in May, the MPC saw price growth staying below the goal until the second quarter of 2018.
The BOE plans to look through the currency-driven inflation spike and will take longer than usual to get price growth to target.
It said action to counter the pound’s impact would only hurt growth and push up unemployment.
In an exchange of letters with Chancellor of the Exchequer Philip Hammond, Carney said the MPC remained committed to taking whatever action is needed to support growth. Hammond replied that he was also willing to take “any necessary steps to support the economy” and that he would outline his fiscal plans in his Autumn Statement later this year.
The BOE said while it hadn’t made any assumptions about the outcome of the government’s Brexit negotiations or any new trade deals, its forecasts were conditioned on a gradual worsening of the economy’s openness.
The forecasts were also based on market expectations for interest rates to fall to as low as 0.1 per cent between the fourth quarter this year and the third quarter of 2018.