Bank Cuts Base Interest Rate To Historic Low

The Bank of England has taken radical action to prevent the UK from falling into recession, cutting interest rates to 0.25% - the lowest level in the institution’s 322-year history - and pumping billions of pounds of newly created money into the economy.

The Bank cut its forecasts for the growth of the UK economy by the biggest single amount since it starting producing regular forecasts in 1993, slashing its GDP projection next year from 2.2% to 0.8% and predicting a rise in unemployment from 5% to 5.4%.

Not only did the Bank's Monetary Policy Committee cut interest rates by a quarter percentage point, they also signalled that if the economy performed as the Bank had forecast, they would cut them down to "its effective lower bound at one of the MPC (KOSDAQ: 050540.KQ - news) 's forthcoming meetings during the course of the year.

"The MPC currently judged this bound to be close to, but a little above, zero."

:: Bank Of England's Package Is Radical Stuff

The cuts formed part of a broad package aimed at preventing the UK economy from suffering a post-Brexit slump.

The Bank said that alongside the rate cut it would reignite its quantitative easing scheme, buying a further £60bn of government debt and taking the total size of the scheme to £435bn.

It (Other OTC: ITGL - news) would also buy up to £10bn of corporate bonds.

In an effort to ensure the rate cuts would be passed on to customers without banks facing their own funding costs, the Bank also said it would create a £100bn system it called the Term Funding Scheme to provide cheap funding to banks.

The combined package may result in an extra £170bn of money being printed, making it one of the biggest single policy packages ever unveiled by the central bank.

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However, the MPC's nine members were split on some of the decisions, underlining their controversial nature.

While all of them supported the cut in interest rates, Kristin Forbes voted against the purchases of corporate debt and three members voted against the £60bn purchase of extra government debt.

In a letter to the Bank responding to the decision, the Chancellor, Philip Hammond, approved the move and said: "Alongside the actions the Bank is taking, I am prepared to take any necessary steps to support the economy and promote confidence."

At a news conference after the announcement, Governor Mark Carney said Britain is expected to avoid recession but would face slower growth than previously predicted over the "next few quarters".

:: Pound Down Following Interest Rate Decision

He said: "The UK can handle change. It has one of the most flexible economies in the world.

"To be clear, the future potential of this economy and its implications for jobs, real wages and wealth, are not the gifts of monetary policymakers.

"We cannot immediately or fully offset the economic impacts of a large structural shock.

"However, monetary policy can support the necessary adjustments of the UK economy during a period of heightened uncertainty.

"That is why at its meeting yesterday, the NPC (Taiwan OTC: 6542.TWO - news) agreed an exceptional package of measures comprising, first a 25 basis point reduction in bank rate and 0.25%."

He added that he expects several factors to cause investment to slow over the coming months.

He said: "These include a protracted period of heightened uncertainty, weaker activity in residential and commercial real estate and higher cost of capital for UK focused firms. Some of these effects are beginning to manifest in surveys of investment intentions, business activity, and the housing market.

"These indicators have all fallen sharply.

"The MPC has been conservative in its interpretation of these data, producing a forecast stronger than historical relationships would have implied.

"Nonetheless, we expect aggregate demand to grow only a little over the next few quarters before picking up to rates below those projected in May."

Stock markets reacted positively to the move, with the FTSE leaping nearly 100 points in the minutes after the rate cut announcement.

The pound fell on the move, falling more than 1% against the euro and nearly 2 cents against the dollar.

The National Federation of Self Employed and Small Businesses (FSB) and Confederation of British Industry (CBI) welcomed the cut in rates.

FSB national chairman Mike Cherry said: "Lower rates should lead to cheaper borrowing costs, making finance more affordable and helping to support business investment.

"Small firms will also welcome the boost to household spending power and consumer demand.

"However, FSB members do have concerns about the longer term economic outlook."

CBI chief economist Rain Newton-Smith added: "The Bank's action will help restore confidence in the UK economy and what's now most important to businesses is that the Government develops a clear plan and timetable for EU negotiations."

The British Chambers of Commerce remains more cautious however.

Dr Adam Marshall, acting director general of the BCC (Taiwan OTC: 8325.TWO - news) , said: "Lower interest rates may give a helpful boost to market confidence, but have little long-term effect on businesses when rates are already so low.

"What businesses want is low, stable interest rates for the foreseeable future."

Labour's shadow chancellor John McDonnell responded to the rate cut by saying: "Now (NYSE: DNOW - news) that the Bank of England has confirmed that they are taking action to support the economy through difficult times, it's time for the Chancellor of the Exchequer to step up and shoulder his share of responsibility for economic stability.

"Britain is on hold waiting for Philip Hammond to tell us whether he will stick to his predecessor's planned cuts.

"It's essential that the monetary authorities are given all the tools they need but also that fiscal policy is allowed to work alongside monetary policy."