Bank Cuts Interest to 0.25% and Announce Post-Brexit Stimulus Package


August 2016

Bank Cuts Interest to 0.25% and Announce Post-Brexit Stimulus Package

Following its latest meeting, the Bank of England’s Monetary Policy Committee has voted, as expected, to reduce the base rate of interest down to a record low of 0.25%.

Following the Brexit vote, the Bank explained, “the exchange rate has fallen and the outlook for growth in the short to medium term has weakened markedly.” The drop in the value of the pound is likely to exert upward pressure on inflation and, the Bank predicts, will push it beyond the 2% target before “the exchange rate effect dissipates thereafter”.

The Bank also highlighted weakened outlooks for activity and supply, agreeing with various recent surveys including the Markit/CIPS PMI reports, that “confidence and optimism suggest that the United Kingdom is likely to see little growth in GDP in the second half of this year.

The cut to the base rate is one of several measures announced by the Bank in order to maintain economic stability in the months ahead amid the upset that followed the referendum.

Others measures announced include a new “Term Funding Scheme” designed to ensure that banks pass the reduced interest on to their customers, the “purchase of £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases up to £435 billion.”

The Term Funding Scheme (TFS) is important, given the Bank’s aim of making sure that the base rate cut is passed on to make borrowing costs cheaper for households and businesses. The Bank acknowledged that because of how close to zero interest rates were even before the cut, “it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn might limit their ability to cut their lending rates”.

In order to mitigate this difficulty, the Bank said, they will be “launching a Term Funding Scheme that will provide funding for banks at interest rates close to the Bank Rate.”

The Bank’s governor, Mark Carney, said to journalists after the meeting: “The banks have no excuse, with today’s announcements, not to pass on the cut in bank rate and they should write to their customers to make that point.”

MPC also hinted that further interest rate cuts could occur in the near future, depending on the impact of the stimulus package and the general progress of the economy.

However, Carney made it clear, as he has before, that negative interest is firmly off the table. He said, unequivocally, “No, on the negative interest rates conversation, I don't see a scenario for that. I think I've been about as clear as I can be on that. Just write whatever you want to take that off the table from me. I'm not trying to be clever in the way I'm answering that question.”

Ultimately, Carney said, the stimulus measures will be sufficient to allow the UK to weather the current storm and to make Brexit “more likely to be a success”.

He said, in his opening statement, that while “some of the adjustments to this new [post-Brexit vote] reality may prove difficult, and many will take time…the UK can handle change”.