The Bank of England (BOE) yesterday cut interest rates for the first time since 2009 and said it would buy £60 billion (US$78.83 billion) of government debt to ease the blow from Britain’s June 23 vote to leave the EU.
The central bank said it expected the economy to stagnate for the rest of this year and suffer weak growth throughout next year.
It cut its main lending rate to a record low 0.25 percent from 0.5 percent, in line with market expectations.
However, it also launched two new schemes, one to buy £10 billion of high-grade corporate bonds and another — potentially worth up to £100 billion — to ensure banks keep lending even after the cut in interest rates.
Sterling fell 1 percent against the US dollar following the bank’s announcement, while British government bond yields hit record lows and the main share index rose by 1 percent.
Most Monetary Policy Committee (MPC) members also expected to cut bank rate again this year to a rate “close to, but a little above zero,” if the economy performed as poorly as forecast.
“Following the United Kingdom’s vote to leave the European Union, the exchange rate has fallen and the outlook for growth in the short to medium term has weakened markedly,” the central bank said in its quarterly inflation report.
British Minister of Finance Philip Hammond welcomed the rate cut and said he and BOE Governor Mark Carney had “the tools we need to support the economy as we begin this new chapter and address the challenges ahead.”
Policymakers were not united on how to respond to the fallout from Brexit. The cut in bank rate and the measure intended to ensure banks passed it on to consumers — known as the term funding scheme — gained unanimous support.
However, three policymakers — Kristin Forbes, Ian McCafferty and Martin Weale — opposed raising the target for quantitative easing government bond purchases to £435 billion from the £375 billion total reached in late 2012.
While many business surveys show Britain’s economy has slowed sharply and might even be entering recession, it is too soon for official data on how the EU vote is affecting output.
The BOE left its forecast for growth this year steady at 2 percent, as the economy expanded faster in the first half of the year than it had expected in May.
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