The Bank of England (BoE) have decided to take drastic actions to stop the UK entering a recession by cutting interest rates from 0.5% to 0.25% and pushing billions of newly created money into the economy. This is the lowest level interest rate cut in the institution’s history of 322 years. The BoE also dramatically cut its growth forecasts for the UK economy by the largest singular amount since 1993, dropping its GDP projection for 2017 from 2.2% to 0.8% while also predicting unemployment to rise to 5.4% from 5%.
The Bank hinted that if the economy performs as they have forecasted that they would further cut interest rates down to “its effective lower bound at one of the Monetary Policy Committee’s (MPC) forthcoming meetings during the course of the year. The MPC currently judged this bound to be close to, but a little above, zero”.
Alongside this rate cut the BoE will reignite its quantitative easing scheme, buying a further £60bn of government debt and taking the total size of the scheme to £435bn. They would also buy £10bn of corporate bonds.
The Bank said it would create a £100bn system it called the Term Funding Scheme to provide cheap funding to banks. This will lend directly to banks at rates close to the new 0.25% base rate to encourage them to pass on lower interest rates to businesses and households. Mr Carney, the governor of the BoE, took a tough stance on the introduction of its Term Funding Scheme. The governor said that banks have “no excuse” not to pass on the lower borrowing costs to customers and will be charged a penalty if they fail to do so.
This combined package may also result in an extra £170bn of new money being printed, which would make the policy package one of the biggest ever to be unveiled by the central bank.
At a news conference after the announcement, Mark Carney said Britain is expected to avoid recession but would face slower growth than previously thought, with the bank believing that it could fall worryingly close to zero over the final six months of this year.
Carney said: “By acting early and comprehensively, the MPC can reduce uncertainty, bolster confidence, blunt the slowdown, and support the necessary adjustments in the UK economy.”
Stock markets reacted positively to the move, with the FTSE jumping almost 100 points in the minutes after the rate cut announcement.
The pound fell on the move, falling more than 1% against the euro and nearly 2 cents against the dollar. A weaker pound makes imported goods more expensive, which boosts inflation. The Central Bank has predicted that inflation would rise above its 2% target. Further sterling volatility is expected in the coming days as markets react to these announcements. Secure your margins today by talking to one of our trade experts.
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