Bank of England cuts rates for first time since 2009

The Bank of England cut interestrates for the first time since 2009 on Thursday and said itwould buy 60 billion pounds of government debt to ease the blowfrom Britain's June 23 vote to leave the European Union.

The central bank said it expected the economy to stagnatefor the rest of 2016 and suffer weak growth throughout nextyear, and lowered its main lending rate to a record-low 0.25per cent from 0.5 per cent, in line with market expectations.

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"By acting early and comprehensively, the (Bank) can reduce uncertainty, bolster confidence, blunt the slowdown and supportthe necessary adjustments in the U.K. economy," Bank of EnglandGovernor MarkCarney told a news conference.

Although the bankforecast that Britain would avoid recession, Carney warned of a significant slowdown, with unemployment rising to 5.5 per cent from 5 per cent and falling house prices over the next year. The bank alsopredicts inflation will rise past the 2 per cent target within three years to around 2.4 percent in 2018 as the weaker pound makes it more expensive to import goods and services.

Sterling, bond yieldsdown

Sterling initially rose against the U.S.dollar following the announcement,butquickly fell to as low as $1.3112 US. It last traded at $1.3142,down 1.4 per cent on the day. It lost 1.1 percent against theeuro, with the single currency last at 84.67 pence.

British government bond yields hit recordlows and the main share index rose by nearly 2 per cent.

The BoElaunched two new schemes, one to buy 10 billionpounds of high-grade corporate bonds and another potentiallyworth up to 100 billion pounds to ensure banks keep lendingeven after the cut in interest rates.

'No excuse' for banks not to pass on rate cut to their customers: Carney

8 years ago

Duration 13:32

Bank of England governor cuts interest rates for the first time since 2009

Most MPC (Monetary Policy Committee) members also expected to cut Bank Rate again thisyear to a rate "close to, but a little above zero,"if theeconomy performed as poorly as forecast.

"Following the United Kingdom's vote to leave the EuropeanUnion, the exchange rate has fallen and the outlook for growthin the short to medium term has weakened markedly," the centralbank said in its quarterly Inflation Report.

Economy slowing

Policymakers were not completely united on how to respond.The cut in Bank Rate and the measure intended to ensure bankspassed it on to consumers known as the Term Funding Scheme(TFS) gained unanimous support.

But three policymakers Kristin Forbes, Ian McCafferty andMartin Wealeopposed raising the target for quantitativeeasing government bond purchases to 435 billion pounds from the375 billion total reached in late 2012.

Forbes also opposed the purchases of corporate debt something the BoE did briefly after the financial crisis, butmore to aid market functioning than to boost growth.

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Many economists had expected Forbes to oppose a rate cutafter she said last month that the central bank should not panicand instead wait for more data on the scale of Britain'seconomic slowdown.

While many business surveys show Britain's economy hasslowed sharply and may even be entering recession, it is toosoon for official data on how the EU vote is affecting output.

Uncertainty with Brexit

"The U.K.'s trading relationships are likely to change, but precisely how will be unclear for some time," Bank of England Governor Mark Carney said in a statement after the cut.

"If companies are uncertain about the future impact of [Brexit] on their businesses, they could delay decisions about building supply capacity or entering new markets," he said.

He said the TFS will "reinforce the transmission of cuts" to the "interest rates actually faced by households and firms."

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Carney said he had unveiled an "exceptional package ofmeasures" because the economic outlook had changed markedlyfollowing the Brexit vote.

However,Dutch bank ING described the measures as"sledgehammer stimulus."

"With respect to savers, let me say that this is something we think about a lot, the group of people who have worked hard, absolutely done the right thing, set money aside, and the returns are very low and they're likely to be low for some time," Carney said.

"The Bank of England has hit a perfect 'High Five' attoday's meeting, over-delivering against market expectations andbucking the recent trend of central banks disappointing," JPMorgan Asset Management portfolio manager, Nick Gartside, said.

The BoE left its forecast for growth this year steady at 2.0per cent, as the economy expanded faster in the first half of2016 than it had expected in May.

But 2017 brings a sharp downgrade to growth of just 0.8per cent from a previous estimate of 2.3 per cent the biggestdowngrade in growth from one Inflation Report to the next,exceeding what was seen in the financial crisis. The growthoutlook for 2018 was cut to 1.8 per cent.

Inflation forecasts revised

The BoE also revised up its inflation forecasts sharply, dueto the big fall in sterling since the financial crisis,predicting it will hit 2.4 per cent in 2018 and 2019. The MPCsaid the costs of trying to bring it back to its twoper centtarget in the immediate future would exceed the benefit.

The Monetary Policy Committee launched the Term FundingScheme to make sure that the lower levels of interest rates nowset by the Bank of England are reflected in the costs commercialbanks charge households and companies to borrow funds.

The Bank said it does not expect the scheme to lead tosignificantly faster aggregate loan growth, but to offset anyhit to lending from a cut in official interest rates closer tozero.

Eligible institutions will be able to borrow four-yearcentral bank reserves for an initial period of 18 months atrates close to the Bank Rate.

The lowest cost of funding, the 0.25 per cent Bank Rate, willbe for banks that maintain or expand net lending to the economyand the BoE will charge a penalty rate if banks reduce netlending.

The MPC said it could adjust the terms and length of thescheme, which is funded by central bank reserves and that thevalue of lending will be determined by usage of the scheme andcould reach around 100 billion pounds.

New finance minister Philip Hammond, who replaced GeorgeOsborne last month, authorised the bond purchases and the TFS.

"Alongside the actions the Bank is taking, I am prepared totake any necessary steps to support the economy and promoteconfidence," Hammond said in a letter to the central bank.

"The government will set out its fiscal plans at the AutumnStatement in the normal way."released alongside its quarterly economicforecasts.

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