LONDON—The Bank of England cut its benchmark interest rate to the lowest in its 322-year history and revived a financial crisis-era bond-buying program to cushion the U.K. economy from the aftershocks of the vote to leave the European Union.
Thursday's unexpectedly large and diverse stimulus package—which included a torrent of cheap cash for banks—underscores the concern at the central bank following the June 23 referendum.
The BOE sharply cut its growth forecast for 2017, marking the biggest downgrade since it began publishing such forecasts in 1993, saying the outlook had "weakened materially."
Central banks, including the Federal Reserve and the European Central Bank, say they are watching closely in case the move toward Brexit sparks another damaging bout of financial-market contagion and economic instability. However, the fallout so far appears confined to the U.K., with early signs that the U.S. and eurozone economies have shrugged off the surprise result.
The package's aspects didn't gain unanimous support from the rate-setting Monetary Policy Committee, reflecting caution among some officials that the trickle of economic data since the vote didn't yet justify such a broad response. The few bits "may overstate the weakness of the economy," they said.
But BOE Gov. Mark Carney was adamant that surveys showing steep declines in consumer and business confidence point to a looming slowdown. And officials said they expect uncertainty over the U.K.'s future economic relationship with the EU and the rest of the world to stunt investment in Britain for years to come, squeezing the economy's capacity to produce goods and services.
"There is a clear case for stimulus, and stimulus now," Mr. Carney said at a news conference, in the latest attempt by officials to reassure Britons that they are acting decisively.
The stimulus package contained four elements. The BOE cut its benchmark interest rate to 0.25% from 0.5% and said it expects to cut it further toward zero in the months ahead. It revived a program to buy U.K. government bonds that has been on pause since 2012, and announced it would begin buying corporate bonds, too. The final part was a new term-funding program for banks, offering lenders ultracheap four-year loans to finance lending to households and businesses.
All nine committee members supported a rate cut but three voted against new bond purchases, believing them premature. One, Kristin Forbes, advanced the same argument in opposition to corporate bond purchases. All nine backed the new bank funding.
The package marks a reversal for the BOE, which before the Brexit vote had been expected to follow the Fed in raising interest rates later this year.
Fed officials expressed growing confidence at their last policy meeting in late July that they could raise rates at least once this year now that markets have largely settled post-Brexit vote and the U.S. economy appears to be on a solid footing.
The breadth of the BOE program caught some investors by surprise. The pound fell 1.4% against the dollar to $ 1.3143, while the yield on 10-year U.K. government bonds, known as gilts, fell to a record low of 0.644% before recovering slightly. London's FTSE 100 index reversed earlier losses to close up, with financial shares climbing steadily.
The BOE painted a subdued picture in a fresh set of quarterly economic forecasts, although it said the U.K. economy would probably avoid an outright recession. It cut its growth forecast for 2017 to 0.8% from 2.3% in May, and trimmed its 2018 forecast to 1.8% from 2.3%.
Officials described multiple ways they see the Brexit vote weighing on growth, despite the new stimulus. They were downbeat on consumer spending and the housing market, and said while they expect exports to get a short-term boost from the weaker pound, that would tail off while the U.K.'s trading status remains unclear. Unemployment is expected to increase, to around 5.5% or 5.6% by 2018, from 4.9% currently, the BOE said.
It added that the sharp fall in the pound and the stimulus it just announced would drive annual inflation back to its 2% target by next year. Its forecasts show inflation will temporarily overshoot the target in 2018, reaching 2.4%, but officials called that a price worth paying to keep the economy on track.
While the BOE can cushion the economy, it can't completely offset the impact of the vote, Mr. Carney said, an assessment shared by many economists.
"Monetary policy is a painkiller, but it's not a panacea for the Brexit shock we are now experiencing," said Azad Zangana, European economist at asset manager Schroders PLC. Mr. Zangana, a former U.K. treasury official, said the government needs to step up with tax cuts to lure investment and possibly sustain consumer spending to shore up the economy.
U.K. treasury chief Philip Hammond said Thursday that he is "prepared to take any necessary steps to support the economy and promote confidence."
He hasn't presented detailed plans yet, but since becoming Chancellor of the Exchequer last month, He has said he intends to "reset" tax-and-spending policy before the end of the year, after ditching plans advanced by his predecessor, George Osborne, to close the U.K.'s budget deficit by 2020.
The BOE said it would purchase £60 billion ($ 80 billion) of U.K. government bonds over the next six months, aimed at lowering long-term interest rates to keep a lid on borrowing costs for consumers and companies. It said it also would purchase £10 billion of corporate debt over 18 months, beginning in September, in the hope of fueling business investment. The BOE said bonds issued by 150 companies could be eligible.
"All of the elements in this package have scope to be increased," Mr. Carney said.
Mr. Carney was clear the BOE wouldn't follow other European central banks and the Bank of Japan in setting negative interest rates, saying he's "not a fan." He also dismissed a form of stimulus known as helicopter money, under which a central bank funds an increase in government spending or dishes out cash to consumers.
"I can't conceive of a situation in which there would be a need to have such flights of fancy here in the U.K.," he said.
Some Brexit supporters accused Mr. Carney during the campaign of scaremongering after he said leaving the bloc would threaten financial stability and could tip the economy into recession.
Mr. Carney is due to face a grilling during a regularly scheduled appearance before Parliament's cross-party treasury committee in the coming weeks.
Jacob Rees-Mogg, a lawmaker on the committee who was critical of Mr. Carney before the referendum, said Thursday it might have been better if the BOE had delayed taking action until it had a clearer sense of the economic implications of the vote. Mr. Rees-Mogg, from the governing Conservative Party, had campaigned to leave the EU.
"It's interesting the BOE has gone so far, so fast on information purely on sentiment, not on anything yet happening in the economy," Mr. Rees-Mogg said. "They might have been a little more patient."
—Christopher Whittall and Jenny Gross contributed to this article.
Corrections & Amplifications:
Kristin Forbes is a member of the Bank of England's Monetary Policy Committee. An earlier version of this article misspelled her first name as Kristen. (Aug. 4, 2016)
Write to Jason Douglas at jason.douglas@wsj.com and Paul Hannon at paul.hannon@wsj.com
No comments:
Post a Comment