Forex Trading Library

BoE’s Carney: “Whatever it takes”

0 466

Image Via Bank of England / Flickr

Bank of England delivers, cuts rates and expands QE. Signals more easing if necessary.

Bank of England Monetary Policy Decision

  • Interest rates cut to 0.25%
  • QE expands by 60 billion to 475 billion
  • Scheme for banks to pass on rate cuts to customers

The Bank of England, at the monetary policy meeting today, delivered more than the markets were expecting. Besides cutting rates by 25 basis points, bringing the benchmark interest rate to 0.25%, a new historic low, the central bank also expanded its asset purchases, dipping into corporate bonds as well.

UK Interest Rate: 0.25%, August 2016
The UK Interest Rate: 0.25%, August 2016

The bank announced that the stimulus program would include a 100 billion scheme for banks to pass on the low-interest rates to households and businesses while buying 60 billion and 10 billion in government and corporate bonds respectively. BoE Governor Carney said that the banks had no excuse not to pass on the lower borrowing costs to customers and warned that the banks could be charged a penalty if they did not lend. “The MPC is determined that the stimulus the economy needs does not get diluted as it passes through the financial system,” Carney said.

MPC Votes: Unanimous on rate cuts, divided on QE

While the rate cut from the BoE was decided by a 9 – 0 unanimous vote, at least three members voted against increasing stimulus, namely Kristin Forbes, Martin Weale and Ian McCafferty. Interestingly, it was Martin Weale, who just a few days said that he favor more stimulus for the UK economy. Weale will be stepping down from the MPC as his two, three-year terms draws to a close.

Growth forecasts downgraded

The Bank of England also released its growth forecasts. According to the central bank, GDP is expected to grow at a pace of 0.80%, this was sharply lower from its earlier estimates in May where the bank projected a growth rate of 2.30% for 2017. Carney said, “We took these steps because the economic outlook has changed markedly, with the largest revision to our GDP forecast since the MPC was formed almost two decades ago.” The lower GDP forecasts mark one of the biggest downward revisions in forecasts for the central bank.

On inflation, the central bank expects consumer prices to rise to 2.10% in 2017 and to 2.40% in 2018 on account of a weaker exchange rate.

Carney: Not a fan of negative interest rates

At the press conference, the BoE Governor said, “all measures have the scope to be increased in the future” he said “I’m not a fan of negative interest rates. We have other options to provide stimulus if more stimulus were needed, so we don’t need to go to that resort” in an indication that the BoE could stand by to expand its bond purchases, while interest rates are likely to remain at 0.25% over the considerable future.

BoE’s Policy Measures

  • The central bank will purchase £60 billion of UK Gilts over the next 6-months
  • BoE will purchase £10 billion of corporate debt over the next 18-months, beginning September
  • BoE will offer banks cheap 4-year loans via a new term-funding scheme or TFS

Full details of the BoE’s decision can be accessed from here.

Leave A Reply

Your email address will not be published.