Bank Of England Tries To Head Off Recession
The dismal news on the British economy has forced the Bank of England to take some dramatic measures to ward off the oncoming recession caused by Britain’s decision to leave the EU. The actions announced today constitute a four-pronged attack by the Bank. First, the Bank cut interest rates in half, from 0.50% to 0.25%, marking the first time in Bank’s over 300 year history that the rate has been set so low. Second, it promised an additional 60 billion pounds for its quantitative easing program which tries to lower yields by purchasing bonds. It also enacted another 100 billion pound program to help banks provide cheap loans to UK businesses. And, in a somewhat controversial act, it also pledged to buy 10 billion pounds of corporate debt from those “making a material contribution to the UK economy”. The controversy will, of course, center on who actually makes that decision and how the decision will be made. The Bank also announced a severe contraction in its growth forecasts for the UK economy for 2017 and 2018. The new growth forecast for 2017 is 0.8%, barely more than one-third of the pre-Brexit estimate of 2.3%.
Governor Mark Carney made it clear that he expects banks to pass on the savings in the reduced interest rates and new lending plan to consumers and businesses, but there is no guarantee that the banks will comply. That has always been one of the huge issues that central banks have had in trying to stimulate the economy in a low-investment environment. Initially, it appeared, most, but not all, variable rate mortgage rates had taken the rate cut into account. Carney also did not rule out further rate cuts or other measures in the near future if the economic situation continued to deteriorate.
This was about as strong a move as the Bank could make. The stock market rose and the pound fell slightly after the announcement. The next move now is clearly with the May government to see what kind of fiscal stimulus they will add to the economy sometime this fall. If the economic numbers continue to sink, the pressure for a significant stimulus will only grow.