Bank of England Approves a Package of Easing Measures

August 4, 2016

Although criticized for meddling in national politics and overstating the dangers, Bank of England Governor Carney’s pre-referendum warning against the economic consequences of a voter decision to leave the European Union have proven to be spot on accurate.  It now falls to the central bank to do “whatever it takes” to counter those repercussions.  At this month’s meeting, the nine-person Monetary Policy Committee

  • Cut the Bank Rate, which had been 0.50% since March 2009, in half to 0.25% and said that the rate may eventually have to be cut to around zero.
  • Unveiled several quantitative elements of stimulus totaling GBP 170 billion (or roughly $223 billion).  The program of gilt purchases was augmented by GBP 60 billion from a prior ceiling of GBP 375 billion that had been reached in late 2012. The incremental buying will be done over the coming half year.  Corporate bonds of up to GBP 10 billion will be also bought, and a new Term Funding Scheme has been created to promote bank lending.

Officials released a statement justifying these actions and including forward guidance that every element of the stimulus could be enhanced further in the future if needed.  The statement calls the growth outlook markedly worse in the wake of the Brexit vote from both a near-term and medium-term standpoint, but also notes that the implication for inflation points to a higher path of acceleration reaching the 2% target sooner (that is, around mid-2017) followed by above-target results.  But the overshoot is expected to prove temporary, and a likelihood exists of inflation falling back under target eventually if policy isn’t loosened now. Even with the changes, projected growth in 2017 has been sliced to 0.8% followed by 1.8% in 2018.  Both years will see weaker U.K. growth than in 2016.

The MPC voted unanimously to cut the interest rate and introduce the Term Funding Scheme but drew one dissent on the matter of corporate bond buying and three nay votes regarding the resumed buying of government debt.

The quickest transmission of the central bank’s stimulus could be delivered by a decline of sterling’s external value, but even that channel impacts real activity with some lag. GDP is likely to be flat or a bit negative in the second half of 2016. The three U.K. purchasing manager indices in July had readings of 47.4 on services, an 88-month low, 48.2 on manufacturing, a 41-month low, and 45.9 on construction, an 85-month low.  Readings under 50 indicating deteriorating conditions.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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