LONDON (Reuters) - The Bank of England cut interest rates for the first time since 2009 on Thursday and said it would buy 60 billion pounds of government debt to ease the blow from Britain's June 23 vote to leave the European Union.
The central bank said it expected the economy to stagnate for the rest of 2016 and suffer weak growth throughout next year.
KEY POINTS:
- Policymakers vote 9-0 to cut bank rate to 0.25 pct from 0.5 pct
- Most MPC members likely to back further rate cut to near zero in 2016 if incoming data consistent with forecast
- Policymakers vote 6-3 to increase total government bond purchases to 435 bln pounds from 375 bln
- 10-year UK government bond yield falls to record low
- Sterling extends losses against dollar to trade down more than 1 percent on day
COMMENTARY:
Andrew Sentance, senior economic adviser at PwC and former MPC member:
"This cut in interest rates was widely expected, but it is really a token gesture which is unlikely to help the economy much in the current situation. Savings rates are already near-zero and borrowing costs for business and homeowners are extremely low. The pound could well weaken further, adding to inflation and business costs. The margin banks earn on their lending is likely to be squeezed, creating new pressures in the financial system.
"The uncertainty created by the Brexit referendum result cannot be addressed by small changes in interest rates or other monetary measures. It requires a political response from the government, to make clear the nature of our future relationship with the EU - which will inevitably take time. There are some circumstances when a central bank can do little to offset the shock to the economy and the resulting uncertainty, and that is the case now.
"Additional Quantitative Easing is unlikely to be effective in the current climate. QE helps to push down bond yields and boost financial confidence, and had a positive effect back in 2009 when the financial system was so weak. But this situation is different, and QE could create unintended consequences - weakening the pound and further undermining the already low rates of return which pension funds and other investors are able to earn."
Scott Corfe, director, Centre for Economics and Business Research:
"This monetary policy loosening is generally welcome and should support business investment and export-driven growth during challenging economic times. Consumers will feel the pinch though, as a persistently weaker pound and higher inflation for imported goods drive up the cost of living. Declining saving and annuity rates will also hit many households. Be under no doubt that this loosening has lots of winners and losers.
"Monetary stimulus is far from sufficient to drive economic growth at present, especially as many of the benefits from policy have already been exhausted and the announced policy package is really rather modest - this is no game-changer. A small cut in interest rates from historically low levels will not have a big impact on mortgage interest payments or the cost of finance, particularly if low yields erode bank profits.
"Even with this stimulus, Cebr expects economic growth to slow from about 1.5 percent this year to less than 0.5 percent in 2017. A recession - at least a couple of quarters of negative growth - will be difficult to avoid and unemployment is likely to rise from current levels."
Jonathan Loynes, chief European economist, Capital Economics:
"There have been some suggestions that a policy loosening will have no impact on the economy and could even adversely affect confidence. But the Committee clearly decided otherwise, wisely in our view. If nothing else, the measures send a strong signal that the MPC is prepared to look through the inflationary consequences of the post-referendum drop in the pound and focus instead on supporting sentiment and activity. Remember too that some of the more pessimistic projections of the impact of Brexit on the economy assumed either no policy response or even a tightening."
Lucy O'Carroll, chief economist at Aberdeen Asset Management:
"The Bank really needed to announce this kind of combination of measures. What will really count is whether the Chancellor provides a fiscal boost in the autumn. Monetary policy can't do much more on its own."
Daniel Mahoney, head of economic research at Centre for Policy Studies:
"The Bank's further loosening of monetary policy could prove problematic for the UK economy. The falling pound means that inflationary pressures are already building up, and today's decision will exacerbate them.
"Investor flight, large increases in the cost of government borrowing along with major losses for pension funds are very real possibilities. This is in addition to the longer term problems of asset price inflation and increasing consumer debt.
"These are risks that will need to be carefully monitored over the coming months and years."
Nandini Ramakrishnan, Global Market Strategist at JP Morgan Asset Management:
"Today's BoE action is a significant step in attempting to support the UK. It is clear the committee is concerned about the scale of the slowdown that is coming for the economy. There is still more they can do in coming months, with further room to cut interest rates and plenty of scope to increase asset purchases beyond today's commitment. Despite the fact that investors are already heavily positioned for further falls in sterling, we expect the weakness in GBPUSD to be continued throughout the year, as the BoE reacts further to the economic weakness."
Rebecca Harding, Chief Economist at British Bankers' Association:
"The decision to cut interest rates and increase quantitative easing sends a clear signal that the Bank of England is taking a 'whatever it takes' approach to stabilising the economy. Weak post-Brexit data is creating a perception that the economy is likely to slow and the decision to reduce rates has been made on the basis of a perception of risk.
"As a package, the measures announced will provide greater certainty for individuals and businesses so they can plan for the future."
Nicholas Wall, portfolio manager at Old Mutual Global Investors:
"The bank clearly felt that it had nothing to lose by delivering more than expected and weakening Sterling further, attempting to raise inflation and nominal GDP. With limited ammunition the central bank clearly felt that it was better to be aggressive and fast in loosening policy."
"The MPC has left the door open to further easing. It didn't put a floor under interest rates (the majority of members see interest rates near zero by year-end), while an expansion of the bank's Asset Purchase Facility is likely should the data deteriorate. Further down the line we expect far closer cooperation between the central bank and government - as this current monetary policy framework reaches its limits, we could creep towards expansionary policy funded by money creation. November's meeting, when the BoE's next Inflation Report is released, could shape up to be very interesting."
James Sproule, economist at the Institute of Directors:
"In the aftermath of the referendum, the Bank of England's credibility in promising it would do whatever it took to maintain market liquidity was very important. But the problem now is confidence, not liquidity or access to capital.
"The decision to increase gilt purchases, when yields are at historic lows, risks further distorting asset prices. It might have been preferable to indicate what forms of further unconventional monetary policy were being contemplated, buying corporate bonds and providing more cheap money to banks, and then to wait for more concrete signs of an slowdown before taking these steps."
"The Bank cannot do the heavy-lifting on boosting business confidence, the Government has to play its part. The real test of confidence is going to be the Autumn Statement ... We would like to see moves to raise the Annual Investment Allowance to half a million pounds, which would encourage business to buy productivity-raising new machinery."
Anthony Doyle, Investment Director at M&G Retail Fixed Interest team:
"What came as a surprise was the extent of the stimulus package which could expand the Bank's balance sheet by 170 billion pounds including 10 billion pounds of corporate bond purchases.
"Today's stimulus package highlights the shift in the Bank of England's approach to managing the economy. There is currently no statistical evidence that the labour market is deteriorating or that inflation is a problem. Faced with the economic uncertainty caused by the UK's decision to leave the EU, the MPC has decided to act early, decisively and in size in order to limit the damage that a contraction in business investment and household consumption could have on the UK economy. Despite today's actions, it remains to be seen whether this will be enough to lift the spirits of businesses and consumers across the UK given the ongoing uncertainty surrounding the UK's relationship with the EU.
"Going forward, we expect that the BoE will enter into 'wait-and-see' mode to allow today's actions to be felt throughout the economy. However, Governor Carney has proven himself to be a dovish central banker and should the economic data weaken in the months ahead, it is likely that he will advocate a range of further monetary policy easing measures including another potential interest rate cut."
Chris Williamson, Chief Economist at Markit:
"The Bank of England has announced aggressive action to shore up the economy and avert a slide into recession. The action is designed to illustrate that the Bank is willing and able to act quickly in response to the economic shock created by the surprise 'Brexit' vote, and is accompanied by assurances that policymakers are "ready to take whatever action is needed" if the bank's revised gloomy forecasts turn out to be correct.
"However, more action may well be needed, and not just from the Bank of England. While all of the measures announced are likely to help support the economy, there are huge question marks over the effectiveness of each measure. Lower interest rates benefit borrowers but, at such low levels, hurt savers, who could in turn cut back on spending. With gilt yields already at historic lows, the impact of additional quantitative easing is also in doubt. There are also concerns that the corporate bond purchase programme may also be constrained by the limited number of companies for which sufficient quantities of bonds can be bought that will have a direct link to the domestic economy.
"The overriding concern is that the Bank can reduce the cost of credit and encourage more lending, but it can do little to boost the demand for lending and spur spending if business and households are worried about the outlook.
"The focus therefore now shifts to the Chancellor's Autumn Statement, which will outline the extent to which fiscal policy will be used to provide additional support to the economy."
(Compiled by Estelle Shirbon and Kylie MacLellan)
