The Bank of England (BOE) trimmed its interest rates and presented a Quantitative Easing (QE) programme as it sets a target to lift the economy and avoid a possible recession after the UK’s decision to exit the European Union (EU).
The BOE unexpectedly decided on initiating a money printing programme in order to purchase government and private sector bonds and at the same time announced its decision to cut interest rates for the first time since 2009. The decision to lower interest rates to 0.25% from the already lowest ever rate of 0.5% has been attributed by some analysts as a compulsory remedy to the high likelihood of the UK economy’s slowdown. The policymakers’ unanimous vote for an interest rate cut has been accompanied by hints that there might be further trims coming up in the near future.
Included in the new economic measures presented by the BOE is a £170 billion package. The BOE intends to increase its asset purchasing volume within the next six months by £60 billion, from £375 to £435 billion. Another £10 billion will be used from September onwards for the purchase of top quality corporate bonds in an effort to ease the corporations’ funding expenses. The rest of the package – £100 billion – will be used by the BOE for its “Term Funding Scheme”. This includes lending to banks at a generous rate to make sure that the cut to the base rate is channeled through to consumers and private sector.
BOE Governor Marc Carney said that the Bank will take all necessary measures for the achievement of financial stability. He pointed that the Term Funding Scheme is a step to counterbalance the effect of lower interest rates to commercial banks’ rate margins and so their borrowers can benefit from lower rates. Mr. Carney vowed to decrease unemployment and in parallel to increase economic activity.
The GBP/USD on Thursday tumbled following the announcement as much as 1.7% all the way to 1.31014 however it ended the daily trading session with 1.5% losses. On a weekly basis the cable suffered losses by 1.1%. Against the euro, the pound also fell on Thursday by 1.4% while it ended the week’s trading session at 0.84791. UK gilt yields also fell to very low levels, the five-year and ten-year gilt yields nosedived to 0.2% and 0.6% respectively.
The BOE does not forecast high GDP growth during the second half of 2016. It expects GDP to increase by 0.1% during Q3 of the current year and also slight increase during the final quarter too. The forecasts imply that there are no expectations for a technical recession which is defined as a contraction in GDP for six months. UK policymakers alerted the markets that they expect, in the short term, an increase in unemployment and slowdown of business investment.