Bank of England cuts interest rates, bolsters QE

The BoE's Monetary Policy Committee voted unanimously to lower interest rates for the first time since 2009, which follows a raft of weak economic data and the UK's vote to leave the European Union.

The Bank voted 6-3 on raising the asset purchase programme by £60bn to £435bn. The three policymakers who opposed further quantitative easing were Kristin Forbes, Ian McCafferty and Martin Weale.

The BoE launched a scheme to buy £10bn of high-grade corporate bonds in the next 18 months.

A so-called Term Funding Scheme, potentially worth £100bn, was also introduced to encourage banks to keep lending after cutting interest rates.

“Today’s historic decision to cut interest rates for the first time in more than seven years is no major shock, but it does indicate growing concern over the state of Britain’s post-Brexit economy,” said Dennis de Jong, managing director at UFX.com.

“Last month Mark Carney’s rate-setters surprised many by holding their nerve when voting against a reduction, but a raft of underwhelming economic data has finally forced their hand.”

The pound plunged 0.41% against the dollar to $1.3270 following the policy announcement.

At the same time, the central bank said it expected the economy to stagnate for the rest of 2016 and experience weak growth through 2017. The Bank left its forecast for growth this year at 2% but lowered its estimate for 2017 growth to 0.8% from a previous projection of 2.3%.

"Following the United Kingdom’s vote to leave the European Union, the exchange rate has fallen and the outlook
for growth in the short to medium term has weakened markedly," the MPC said in its its monetary policy statement.

"The fall in sterling is likely to push up on CPI inflation in the near term, hastening its return to the 2% target and probably causing it to rise above the target in the latter part of the MPC’s forecast period, before the exchange rate effect dissipates thereafter."

The BoE said in its August Quarterly Inflation Report that a majority of MPC members expect to support a further cut to interest rates at one of the upcoming policy meetings this year if economic data worsens.

"The MPC currently judges this bound to be close to, but a little above, zero," the Bank said.

Danske Bank said it expects more monetary easing to follow at the November meeting. It sees a 15 basis point cut to interest rates to 0.10% and an increase to buying of gilts and corporate bonds.

"...we forecast a technical recession in the UK with negative GDP growth in the third quarter and fourth quarter of 2016 and hence we expect BoE to ease further in November, when the next ‘Super Thursday’ takes place (we do not expect BoE to take any actions at the next meeting in September)."