Bank Of England Unveils Massive Monetary Stimulus On Weak GDP Outlook

(RTTNews) - The Bank of England announced a massive package of policy measures, which included a reduction in the interest rate for the first time in more than seven years and an expansion in quantitative easing, to avert the risk of recession.

The bank also drastically downgraded its growth projections as the "Brexit" vote heightened uncertainty and the sharp depreciation in sterling triggered an upward revision to the inflation forecast.

Policymakers also expressed willingness to take interest rates to even lower levels, but signaled that the lower bound will be above zero.

The Monetary Policy Committee, governed by Mark Carney, unanimously voted on Thursday to cut the bank rate by 25 basis points to a fresh record low of 0.25 percent. This was the first reduction in rates since March 2009.

Policymakers voted 6-3 to expand the asset purchase program by GBP 60 billion to GBP 435 billion. Kristin Forbes, Ian McCafferty and Martin Weale voted against the proposition, preferring no change.

The bank introduced a Term Funding Scheme that will be financed by the issuance of central bank reserves. All members voted in favor of this proposition. The TFS is aimed to help to reinforce the transmission of the interest rate cut to the real economy.

The MPC also decided to purchase up to GBP 10 billion of UK corporate bonds. The scheme was approved with 8-1 majority.

All members of the MPC agreed that policy stimulus was warranted at this time, and that Bank Rate should be reduced to 0.25 percent and be supported by a TFS.

"If the incoming data proved broadly consistent with the August Inflation Report forecast, a majority of members expected to support a further cut in Bank Rate to its effective lower bound at one of the MPC's forthcoming meetings during the course of the year," the bank said.

Policymakers now judge the lower bound to be "close to, but a little above, zero."

At the press conference, Carney said lower interest rates will be felt immediately. He said the MPC is determined that the stimulus the economy needs does not get diluted.

According to the Inflation Report, the economy is likely to see little growth in the second half of the year. Business investment is set to continue to fall in the near term on slower demand growth. GDP growth is forecast to ease to 0.1 percent in the third quarter of 2016.

The bank slashed its GDP growth outlook for 2017 to 0.8 percent from 2.3 percent. Similarly, the projection for 2018 was trimmed to 1.8 percent from 2.3 percent.

The fall in sterling is set to push up inflation in the near-term. Inflation is forecast to return to the target in late 2017 and overshoot the 2 percent target throughout 2018.

If the economy continues to weaken, the MPC will come under strong pressure to act again, though monetary policy is clearly approaching its limits, economist Jonathan Loynes at Capital Economics, said.

In a letter to the new Chancellor Philip Hammond, Carney said the bank is committed to take more action and requested some changes to the authorization to the asset purchase plan.

Hammond replied that he is prepared to take any necessary steps to support the economy and promote confidence.

The new chancellor has already stated that the government could reset fiscal policy if deemed necessary.

James Knightley, an economist at ING, said he suspects that it will happen at the Autumn Budget Statement, most likely in the form of greater infrastructure investment financed by borrowing to try and improve the productive potential of the UK economy.