EuropeBank of England cuts interest rates to 0.25% and expands QEPosted on August 4, 201619 min read 0 379 Bank’s monetary policy committee unveils a four-point plan to mitigate the impact of the EU referendum vote.The Bank of England has cut interest rates for the first time in more than seven years and warned high-street lenders to pass on cheaper borrowing costs to customers, in a bigger-than-expected package of measures designed to prevent a post-Brexit recessionThe Bank cut official interest rates to a new record low of 0.25% from 0.5% and signalled they would be reduced further in coming months as the economic fallout from the vote to leave the EU becomes clearer. The move will bring relief to borrowers but has already angered savers who have been getting low returns for years thanks to rock-bottom interest rates.Desperate to ensure the cut is felt by households and businesses in the real economy, the Bank’s governor, Mark Carney, took a tough line with commercial banks, telling them they had no excuse not to pass the lower official borrowing costs onto customers.As part of a four-point package, Carney unveiled additional funds for banks to cushion the blow to their profitability from lower interest rates. He personally called bank bosses after Thursday’s announcement to make it clear the Bank wanted to see the full benefits of its anti-recession strategy felt by households and businesses.Carney used a press conference to argue that a range of measures was needed now to limit job losses and support growth in the UK economy as it went through “regime change” following the decision to leave the EU. The Bank’s forecasts were for a slower earnings growth and for 250,000 job losses, even with these stimulus measures.Early economic indicators suggest confidence among businesses and households slumped after the June referendum and that a slowdown in spending threatens to tip the UK into recession.Carney rebuffed suggestions the Bank was over-reacting to the Brexit vote and implied the UK would fall into recession without the new measures. “There is a clear case for stimulus, and stimulus now, in order to have an effect when the economy really needs it,” he said.Reacting to early economic indicators suggesting demand and output had slowed across all parts of the economy since the June referendum, the Bank announced:A cut in official interest rates to 0.25%, the first such move since March 2009;Plans to pump an additional £60bn in electronic cash into the economy to buy government bonds, extending the existing quantitative easing (QE) programme to £435 bn in total;Another £10bn in electronic cash to buy corporate bonds from firms “making a material contribution to the UK economy”;As much as £100bn of new funding to banks to help them pass on the base rate cut. Under this new “term funding scheme” (TFS) the Bank will create new money to provide loans to banks at interest rates close to the base rate of 0.25%. The scheme will charge a penalty rate if banks do not lend;The growth forecast for the UK for next year was slashed by an unprecedented amount. Growth would come to a near-standstill over coming months and be much weaker in 2017 and 2018 than predicted before the Brexit vote.The Bank of England has cut interest rates for the first time since 2009, to 0.25%The Bank’s intervention to shore up confidence was welcomed by the chancellor,Philip Hammond. He also appeared to respond to repeated assertions from Carney and others that monetary policy had limited power to solve Britain’s economic problems and that action from government was needed. The chancellor, hinting at action from the Treasury in his Autumn Statement later this year, wrote to Carney saying: “Alongside the actions the Bank is taking, I am prepared to take any necessary steps to support the economy and promote confidence.”Hammond also sought to reassure households and business owners that the government and the Bank had the tools needed to support the economy.Echoing that, the Bank’s monetary policy committee (MPC), chaired by Carney, indicated there was more easing to come this year and that it stood ready to expand the credit measures. Minutes from the MPC’s meeting said that if economic news proved consistent with the Bank’s latest forecasts then “a majority of members” expected to support a further interest rate cut, potentially taking official borrowing costs as low as 0.1%. Carney said he was strongly opposed to negative interest rates.But the minutes also indicated that the policymakers were not unanimous on the whole stimulus package. All nine members backed the new TFS scheme and the rate cut. The additional QE was backed by six committee members but opposed by Kristin Forbes, Ian McCafferty and Martin Weale. Forbes also voted against the other eight members on the plan to buy corporate bonds, given she was “particularly concerned about excessive stimulus at this stage”.The Bank’s own forecasts, published in its quarterly inflation report alongside its interest rate decision, predicted there would be virtually no growth in the economy in the second half of this year. The outlook for the coming two years was also cut.Growth this year was forecast at 2%, unchanged from May’s outlook after a much stronger than expected second-quarter growth figure made up for a slowdown after the EU referendum. For 2017, the Bank’s growth forecast was cut to 0.8% from the 2.3% predicted in May. For 2018 it was cut from 2.3% to 1.8%.That cumulative downgrade to growth prospects – 2.5% over three years – was the biggest between inflation reports since they were launched in 1993. Matthew Whittaker, economist at the Resolution Foundation thinktank, said that if the Bank’s forecasts proved correct the economy would be £45bn smaller in 2018 than the MPC had expected just three months ago.The interest rate decision was largely as expected among City analysts but some were surprised at the scale of additional measures. The pound fell sharply against the dollar and euro after the Bank’s announcement but the FTSE 100 share index rallied.Hetal Mehta, economist at Legal & General Investment Management, commented: “The overall package is broad-based – almost a ‘kitchen sink’ approach – and should mitigate the negative impact on banks from ultra-low interest rates.”But economists also questioned how much effect the package would have when there was so much uncertainty about the UK’s future trading relationships.Credit ratings agency Fitch said the Bank’s package was a “proactive policy response” to the EU referendum. “But it is only likely to cushion, rather than fully offset, the shock to UK growth that June’s Brexit vote will cause,” it said.Peter Dixon, economist at Commerzbank, said the BoE had “applied its much-vaunted sledgehammer”.“But for all the ammunition which the BoE has expended, we continue to question how much relief it can provide to counter what is an uncertainty, not a monetary, shock.”Whittaker agreed, saying: “On the severe near-term economic cooling associated with the post-referendum uncertainty, the Bank can help. But longer-term, our economic performance rests on the post-Brexit picture on trade, competition and – crucially – productivity.“Influencing those outcomes largely rests with Downing, not Threadneedle, Street,” he said.