Central Bank cuts interest rates to 0.25%, lowest in 322 years

Central Bank cuts interest rates to 0.25%, lowest in 322 years London (UK) – 05 August 2016 – The Times - The Bank took dramatic emergency action yesterday to prop up the economy, including a ￡170 billion money-printing programme, as it warned that the “outlook for growth has weakened markedly” following the Brexit vote Savers and pensioners will bear the brunt of the Bank of England’s attempts to shore up the economy following the Brexit vote after interest rates were cut to a historic low. The decision to reduce rates to 0.25 per cent, the lowest in the Bank’s 322-year history, was described as “another nail in the coffin” for the ￡1.2 trillion held in current and savings accounts. Rates will be cut further to as little as 0.1 per cent by Christmas, Mark Carney, the Bank’s governor, indicated. Pensioners and savers will be affected on two fronts because the interest they earn diminishes alongside rising inflation, squeezing their buying power. Mark Carney said that the forecasts pointed to “more than a quarter of a million people losing their job” as the UK economy slows The Bank took dramatic emergency action yesterday to prop up the economy, including a ￡170 billion money-printing programme, as it warned that the “outlook for growth has weakened markedly”. The quantitative easing programme will be expanded by ￡60 billion to ￡435 billion — the first increase since 2012 — as part of a package of measures that provided the “sledgehammer” approach demanded by the Bank’s chief economist last month. Mr Carney warned of pain ahead as Britain left the EU but said that “the UK can handle it”. He added that the measures would bring “a greater prospect of a successful adjustment to the new reality that the UK faces”. By 2018 the economy would be 2.5 per cent smaller than was forecast in May on the assumption that Britain would remain in the European Union, the Bank said. The downgrade was the steepest since it started producing forecasts in 1993. A recession would be averted but only because of the drastic action taken by the Bank, it added. Mr Carney’s bad news extended to most households. In its bleakest outlook for Britain since the financial crisis it warned that the recovery in living standards would stall and that house prices would drop. He said that the forecasts pointed to “more than a quarter of a million people losing their job” on top of the 1.65 million that were already unemployed. The unemployment rate, which has been falling, is projected to rise from 4.9 per cent to 5.4 per cent next year and to 5.6 per cent in 2018. Earnings are likely to grow more slowly than expected at about 3 per cent a year. Even after the rate cut and stimulus package the Bank said that there would be “little growth” for the rest of this year. Growth next year will be 0.8 per cent, it said, down from its prediction of 2.3 per cent three months ago. Inflation is expected to increase from 0.5 per cent at present to 2.4 per cent in 2018. This means household disposable income is expected to rise by 0.5 per cent next year, down from a forecast of 1.75 per cent in May — putting family finances back under pressure. House prices were “expected to decline a little over the next year”, the Bank added. To prop up growth, the Bank will buy ￡60 billion of government debt and ￡10 billion of corporate bonds under its quantitative easing programme. It will print as much as ￡100 billion more to subsidise Britain’s banks. The Bank clearly signalled that a further rate cut to as low as 0.1 per cent was on the cards but Mr Carney dismissed suggestions of negative interest rates. Baroness Altmann, the former pensions minister, said that the rate cut and plans to buy an additional ￡60 billion of government debt would deliver a “blow for pensions” by causing deficits to widen, making them less affordable. Graham Vidler, of the Pensions and Lifetime Savings Association, said that companies might now struggle to meet their pension obligations. The Bank has cut rates to 0.25 per cent and signalled that it intends to lower them further, possibly to 0.1 per cent, before Christmas. A lower cost of borrowing will help homeowners by reducing mortgage rates. Savers will be worse off, but the Bank has shown that protecting borrowers has a greater impact on the economy. To ensure that the lower borrowing costs are passed on to households, Mark Carney, the Bank’s governor, has launched the ￡100 billion Term Funding Scheme for high street banks. This enables Mr Carney to offset the impact of a rate cut on banks, thereby making sure that lower borrowing costs are transmitted to the real economy. The Bank has extended the QE programme by ￡70 billion to ￡445 billion. Of that, ￡60 billion will be spent buying government debt and ￡10 billion buying corporate bonds. Both actions will push down the cost of debt and equity for business. The Bank wants to give companies an incentive to raise funds for investment in their UK operations, and so maintain staffing levels, by making their costs even cheaper. Only companies that make “a material contribution to the UK economy” will be eligible for the corporate bond purchases. By the end of 2018 the British economy will be 2.5 per cent smaller than the Bank was predicting before the Brexit vote, even after the measures taken yesterday. The sharpest slowdown will occur next year, for which GDP growth has been downgraded from 2.3 per cent to 0.8 per cent. Growth is predicted to rise to 1.8 per cent in 2018. Britain will just avoid a technical recession, but the Bank’s charts imply that had no action been taken the economy would have shrunk. Mr Carney said that more than 250,000 people will lose their jobs as a result of the Britain’s decision to leave the EU. The Resolution Foundation, a think tank, has estimated that 320,000 people will be made redundant, on top of the 1.65 million already unemployed. The jobless rate, which stands at 4.9 per cent, will rise to 5.4 per cent next year and 5.6 per cent in 2018, the Bank predicts. The recovery in household finances that has occured over the past two years will stall. Disposable incomes after inflation were forecast in May to grow by 1.75 per cent next year, but they are now expected to rise by 0.5 per cent. House prices are also expected to fall slightly over the next year and house building is expected to slow.   Bank slashes its growth forecasts as Brexit bites The Bank of England has cut Britain’s growth forecasts by the largest amount on record as the UK counts the cost of leaving the European Union. The economy will narrowly avoid recession but only because the Bank took unprecedented measures by cutting interest rates to an historic low of 0.25 per cent and launching another ￡170 billion of money printing. Britain’s economy will be 2.5 per cent smaller in 2018 than the Bank had predicted in its pre-referendum outlook in May, as productivity falters and more than a quarter of a million people lose their jobs, the governor said. In a desperate attempt to shore up the post-Brexit economy, the Bank signalled that rates were likely to fall as low as 0.1 per cent by the end of the year. It also unveiled a three-pronged money printing programme and said further measures could be taken if the slowdown deepened. The Bank’s Brexit bazooka “was more comprehensive than we assumed”, Peter Dixon, UK economist at Commerzbank, said. Stock markets were buoyed by the measures, with the FTSE 100 climbing 105.76 points to 6,740.16. Growth next year will be just 0.8 per cent, down from 2.3 per cent forecast in May, and will recover to just 1.8 per cent in 2018. There will be “little growth” in the second half of this year, the Bank added. The weak pound, which fell 2 cents against the dollar to of $1.3125, will push inflation up to 2.4 per cent by 2018 but won’t deliver the hoped for boost to exports. Exports in 2017 are expected to shrink by 0.5 per cent. The cumulative fall in GDP of 2.5 per cent was the sharpest downgrade since the Bank started producing Inflation Report forecasts in 1993. Setting out the full extent of the damage caused by the vote to leave the EU, the Bank said the outlook for growth had “weakened markedly”. Mark Carney rebutted claims that the Bank had over-reacted given the paucity of hard data since the referendum, saying: “I don’t think it’s premature . . . There is a clear case for stimulus now in order to have an effect when the economy really needs it.” Alongside the quarter-point rate cut, the first move in seven and a half years, the Bank unveiled a subsidised funding scheme for lenders to ensure they pass on the rate cut fully. The Term Funding Scheme can be used for up to ￡100 billion and will operate in the same way as quantitative easing by creating new money. “The banks have no excuse, with today’s announcement, not to pass on the cut in Bank rate and they should write to their customers and make that point,” Mr Carney said. Another ￡60 billion of QE was launched to buy gilts and a further ￡10 billion will be targeted at investment grade corporate bonds. The rate cut and the TFS were unanimously supported by the nine-strong monetary policy committee. One member, Kristin Forbes, voted against the corporate bond programme and she was joined by Ian McCafferty and Martin Weale in dissenting against the ￡60 billion extension of gilt purchases. Leaving the EU could damage the UK’s long-term potential if it results in the economy being less open, the Bank said. It cut its forecasts for productivity growth, the key indicator of improving prosperity, from 1.25 per cent to 0.75 per cent this year and from 1.75 per cent to 1.25 per cent in 2017. Unemployment will rise from 4.9 per cent this year to 5.4 per cent in 2017 and to 5.6 per cent in 2018.