BoE cuts rates to 0.25% as part of major stimulus package
The Bank of England has slashed interest rates to a new record low of 0.25%, the first cut in seven years, and policymakers indicated they would vote for further cuts towards zero within months. The move is part of a wide package of measures to help shore up the economy in the wake of the Brexit vote and also consists of plans to pump an additional £60bn in electronic cash into the economy to buy government bonds, extending the existing quantitative easing programme to £435bn in total, another £10bn in electronic cash to be created to buy corporate bonds from firms “making a material contribution to the UK economy,” and a new £100bn “term funding scheme” to provide loans to banks at interest rates close to the base rate of 0.25%. Governor Mark Carney said the Bank would take “whatever action is needed” to promote financial and price stability. He also said Britain could “handle” Brexit and insisted that there was no danger of a recession.
UK forecast to avoid recession
The National Institute of Economic and Social Research (Niesr) expects the economy to contract by 0.2% in the third quarter following the vote to leave the EU, but to grow by 0.1% in the final three months of 2016. The think-tank said this would see the UK avoid a technical recession and that the BoE could boost the economy with a rate cut and further quantitative easing. However, Sir Charlie Bean, a former deputy governor of the Bank, warned yesterday that such measures would do little. “The world is very different from where we were during the financial crisis,” he said. “Rates are already at very low levels. The reason we stopped at 0.5% in early 2009 was because we were concerned that cutting further would be counterproductive –the squeeze on bank margins might in itself reduce the extension of credit.” Niesr expects growth to slow to 1% in 2017, down from a forecast of 2.7% three months ago and for inflation to rise to 3%.
Service sector slumps
The latest Markit/CIPS purchasing managers’ index has revealed the dominant services sector has seen its sharpest fall in seven years, falling from 52.3 in June to 47.4 in July. Chris Williamson, Markit’s chief economist, said the service sector data taken together with the construction and manufacturing data pointed to the UK economy shrinking by 0.4% in three months to September, a fall not seen since early 2009, when the Bank last cut interest rates.