British interest rates cut to 0.25%

UK interest rates have been cut from 0.5% to 0.25%, a low record and the first cut since 2009.

The Bank of England announced a range of measures to stimulate the UK economy including buying £60bn of UK government bonds and £10bn of corporate bonds.

The Bank also announced the biggest cut to its growth forecasts since it started making them in 1992.

It has reduced its growth prediction for 2017 from the 2.3% it was expecting in May to 0.8%.

The decision to cut interest rates to 0.25% was approved unanimously by the nine members of the Monetary Policy Committee (MPC) and is the first change in interest rates since March 2009.

The £60bn increase in quantitative easing to £435bn was approved by a vote of 6-3, with Kristin Forbes, Ian McCafferty and Martin Weale preferring to wait until more concrete data is available rather than relying on surveys.

The corporate bond buying scheme was opposed by one member: Kristin Forbes.

Pound falls
As part of the package of measures designed to boost the economy following the UK’s vote to leave the EU in June, the Bank is also introducing a new Term Funding Scheme, which will lend directly to banks at rates close to the new 0.25% base rate to encourage them to pass on the lower interest rates to businesses and households.

It predicts that the amount of money lent through the scheme could reach about £100bn.

Separately, the corporate bond-buying scheme will purchase up to £10bn of bonds issued by companies outside the financial sector. Only companies considered to be contributing to the UK economy will be eligible. More details of the scheme will be released in September.

The extensive series of measures was revealed the central bank predicting that inflation would rise above its 2% target as a result of the falling value of the pound.

A weaker pound makes imported goods more expensive, which boosts inflation. The pound fell by 1% against the dollar following the Bank’s announcement.

A weaker outlook

The Bank has warned that there will be “little growth in GDP in the second half of the year” although the forecast for 2016 growth has been left unchanged at 2% as a result of stronger-than-expected growth in the first half.

The forecast for 2018 has been cut from 2.3% to 1.8%.

It also expects the unemployment rate to rise to 5.4% next year and 5.6% in 2018.

The MPC meeting was the last one before it moves to only meeting eight times a year, meaning that it is not scheduled to meet again until 3 November, although it can call an extra meeting before then if it wants to.

A majority of MPC members said that if the economy performed as they expected in the coming months, they would support cutting interest rates again before the end of the year to their lowest possible level of “close to, but a little above, zero”.

Fighting off recession

Before the referendum, there were warnings of a recession if there was a vote to leave the EU.

The Bank of England’s quarterly inflation report does not foresee a recession, although all of its forecasts take into account the stimulus measures.

Even with those measures, the Bank still predicts little growth in the second half of the year, suggesting there could have been a recession if the Bank had not acted.

Mark Carney, governor of the Bank of England, has written to Chancellor Philip Hammond to outline the measures taken by the MPC as well as explaining why inflation remains, for now, significantly below its target rate.

In response, Mr Hammond wrote: “Alongside the actions that the Bank is taking, I am prepared to take any necessary steps to support the economy and promote confidence.”

He said that those plans would be set out in the Autumn Statement.

 

BBC/LATEEFAH