The Economy

Bank of England Cuts Interest Rate to 0.25%

The rate cut is part of an "unexpectedly large" package of measures aimed at stimulating the U.K. economy in the wake of the Brexit vote.
Matthew HellerAugust 5, 2016

In more fallout from the U.K.’s vote to leave the European Union, the Bank of England has announced an economic stimulus package that includes cutting its benchmark interest rate to a historic low.

The central bank said all the members of its Monetary Policy Committee agreed at a meeting on Wednesday that “policy stimulus was warranted at this time” and the interest rate should be reduced to 0.25%, the lowest level in the bank’s 322 years and the first cut since 2009.

Other measures in the stimulus package include buying an additional 60 billion pounds, or about $80 billion, in assets under the bank’s bond-buying program, increasing the total to 435 billion pounds; buying up to 10 billion pounds in investment grade corporate bonds from non-financial companies; and launching a program to make it easier for banks to provide lower lending rates to households and businesses.

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“There is a clear case for stimulus, and stimulus now,” Mark J. Carney, the bank’s governor, said at a news conference on Thursday.

According to The Wall Street Journal, the “unexpectedly large and diverse stimulus package … underscores the concern at the central bank” following the Brexit vote on June 23. Officials said they expect uncertainty over the U.K.’s future economic relationship with the EU and the rest of the world to stunt investment in Britain for years to come.

Carney also signaled that the bank could cut rates further this year, but ruled out the possibility of negative interest rates. “This is a timely, coherent and comprehensive package of measures,” he said. “It is appropriately sized given the scale of the shock, the uncertainties about the degree of the adjustment and the relatively limited data.”

The bank cut its growth forecast for 2017 to 0.8% from 2.3% in May, and trimmed its 2018 forecast to 1.8% from 2.3%, but said the U.K. economy would probably avoid an outright recession. It predicted that the sharp post-Brexit fall in the pound and the stimulus package would drive annual inflation back to the BOE’s 2% target by next year.

“Any chance the [U.S.] Federal Reserve had of raising rates this year may have been quashed” by the U.K. bank’s move, CNBC said.