Bank of England cuts rates and expands QE

The Bank of England (BoE) has cut interest rates for the first time since 2009, and expanded its stimulus measures, as it attempts to limit damage to the UK economy in the wake of Brexit.

Key interest rates have been cut by 25 basis points, from 0.5% to 0.25% – a record low and the first cut since the financial crisis. The BoE's monetary policy committee (MPC) signalled further reductions could be expected in the future.

The central bank has launched a fresh round of quantitative easing (QE), with a new £70 billion bond-buying programme dedicated to the purchase of government and corporate bonds that meet specific criteria.

Of the total pot, announced on August 4, £60 billion will be used to buy government bonds, with the total stock of assets over the next six months expected to reach £435 billion.

The remaining £10 billion will be used from September to buy sterling-denominated corporate debt over 18 months from companies that prove to have made a material contribution to the UK economy.

By acting early and comprehensively, the MPC can reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments in the UK economy
Mark Carney, Bank of England

The BoE has also launched a new Term Funding Scheme for banks, aimed at facilitating lending to households and businesses. The programme will provide up to £100 billion from the bank's reserves for cheap four-year loans.

"By acting early and comprehensively, the MPC can reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments in the UK economy," said BoE governor Mark Carney in a press conference after the announcement.

While stating how "all of the elements in this package have scope to be increased", Carney said a move below 0% is to be ruled out, as he is not "a fan of negative interest rates", unlike the Bank of Japan and the European Central Bank, which adopted the extraordinary measures in January and April, respectively.

Growth forecasts slashed

The BoE slashed growth forecasts for the UK economy, signalling how "the outlook for growth in the short-to-medium term has weakened markedly", following the June referendum on the UK's European Union membership.

Although the BoE expects a recession to be avoided, it forecasts 0.1% growth in the third quarter of this year, and periods of stagnation in Q4 2016 and Q1 2017. The central bank expects 0.8% growth in GDP in 2017 and 1.8% in 2018, down from the 2.3% forecast in May for both years in a major revision.

Concerns over the status of the UK economy have been mounting since the Brexit vote, as a decline in investment is likely to reduce the capacity to produce goods and services. Analysts expect the economy to shrink in the coming years, possibly more than expected in the bleak forecasts released in the weeks leading up to the referendum.

In his speech, Carney underlined how the BoE cannot completely offset the impact of Brexit, and it will be the UK government's responsibility to act and take the decisions that will be "determinants of long-term prosperity".

In a letter to Carney, new chancellor Philip Hammond said that, "alongside the actions the [central] bank is taking", he was "prepared to take any necessary steps to support the economy and promote confidence".

Recovery reversal

Following the BoE's rate announcement, sterling fell 1.52% against the US dollar to $1.3123, reversing the somewhat steady recovery after the lows reached in the days post-referendum when it dropped to $1.2798 – the weakest level since the 1980s.

The 10-year gilt yield fell to 0.63%, while longer-dated 30-year gilt yields fell to 1.47%, both a record low.

The FTSE 100 and FTSE 250 jumped after the announcement to around 1.5% to regain pre-Brexit levels, although the weaker sterling of the past five weeks means that when weighted in US dollar and euro terms, both indices remain below pre-referendum levels.

The last time the BoE announced a rate cut was back in March 2009. The half-a-point reduction brought the key interest rate to 0.5% – the lowest level since the central bank was founded in 1964 and the sixth-consecutive cut since October 2008, when rates were 5%. At the same meeting, the BoE began its QE programme, buying government bonds and corporate debt to restart credit markets.

That announcement came in the wake of the financial crisis, amid the worst recession witnessed by the UK in two decades. In January 2009, the country officially entered a recession for the first time since 1991, after the economy shrank at the fastest pace seen for nearly 30 years in Q4 2008.

In February 2008, consumer confidence hit a nine-year low, lenders reported an increase in repossessions as people struggled to meet mortgage payments, and the BoE cut rates by a quarter of a point to 5.25%.

In the coming months, inflation jumped to 3.3% as food and energy prices soared. Meanwhile, the housing market crashed, with prices falling at the fastest rate since 1991.

The BoE continued to slash interest rates: down to 3% in November and then to 2% in December.

Manufacturing and services firms suffered their worst conditions in 16 years and unemployment kept rising, with more than two million people out of work. Thousands of jobs were cut in the City and the financial sector teetered on the brink of collapse, with RBS posting a £28 billion loss in January 2009 and the UK government forced to bail out the banking industry.

Finally, in March 2009, the BoE entered unexplored territory, cutting UK interest rates to 0.5%. A historic low – until today.