Bank Of England Cuts Interest Rates To Avert Recession Following Brexit

Bank of England

The Bank of England decided to cut interest rates Thursday in an effort to block a possible recession following Brexit.

For the first time since 2009, the Bank of England’s Monetary Policy Committee (MPC) convened in a meeting that ended on August 3 to draw some policy measures designed “to provide additional support to growth and to achieve a sustainable return of inflation to the target.”

Members of the MPC reached a decision, which was disclosed to the public on the Bank’s official website, with a package that comprises the following.

  • “25 basis point cut in Bank Rate to 0.25%”
  • “New Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate”
  • “The purchase of up to £10 billion of UK corporate bonds”
  • “An expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.”

According to BBC News, Bank of England Gov. Mark Carney said that majority of the nine-member MPC are also ready to impose further cuts should indications of further decline of the United Kingdom’s economy shows up. The governor expects the package to encourage banks to offer lower interest rates to business and households, warning the banks of penalties if they would not comply.

“The MPC is determined that the stimulus the economy needs does not get diluted as it passes through the financial system,” Gov. Carney said.

Bank of England Gov. Mark Carney

Welcoming the Bank of England’s intervention, which was aimed to shore up confidence with the new package, Chancellor Philip Hammond acknowledged, as quoted by the Guardian, that the “vote to leave the EU has created a period of uncertainty, which will be followed by a period of adjustment as the shape of our new relationship with the EU becomes clear and the economy responds to that.”

“It’s right that monetary policy is used to support the economy through this period of adjustment,” the chancellor said, believing that the government and the bank have all that it takes to support the new package.

Meanwhile, the Economist noted the sharpest decline of the country’s manufacturing, construction and service sector activities posted in July served as the backdrop of the Bank of England’s decision to provide an economic stimulus to counter an imminent recession following the British vote to leave the European Union.

As a result of this decision, economic analysts lowered their projections of the growth of Britain’s economy in 2017, from May’s 2.3 percent forecast to 0.8 percent in the wake of the Bank of England’s decision, the biggest margin since 1993, the Telegraph noted.

Bank of England plaque

Outside of the United Kingdom, European markets started the day trading mixed prior to England’s policymakers’ decision to come up with a new package that will shield their country’s economy from possible recession, according to the Street, a financial media company that specializes in stock markets.

In Germany, German Bundesbank President Jen Weidmann warned that the banks could be hit hard by lower-for-longer rates once they shoot up.

“If the government artificially keeps these banks alive and investors risk decreases, then that is a losing proposition for taxpayers,” Weidmann said, as quoted by the Street. “It is also bad for the economy because ailing financial institutions can provide less credit or possibly try to save themselves through high-risk transactions. A government rescue for all parts of the financial system incentivises excessive risks.”

The United States welcomed the Bank of England’s decision with stocks registering gains, according to Market Watch.

The S&P 500 index SPX, +0.10% added less than 2 points, or about 0.1%, to 2,166, led by a 0.4% gain in consumer staples, followed by a 0.2% rise in industrials. Two of the index’s 10 sectors were in negative territory, led by a 0.1% drop in health-care stocks.

“The Dow Jones Industrial Average DJIA, +0.02% was up 37 points, or 0.2%, at 18,393, led by a 1.1% gain in Nike Inc. NKE, +0.47% but weighed by a 0.9% drop in Walt Disney Co. DIS, -1.27%.”

[Photo by Frank Augstein/AP Images]