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UK interest rates cut as post-Brexit growth forecasts plummet

UK interest rates cut as post-Brexit growth forecasts plummet

🕔04.Aug 2016

The impact of Brexit on the UK economy became clearer today when the Bank of England moved to cut interest rates to record low levels of 0.25%, and pumped a further £60 billion into its quantitative easing programme.

The decisions from the Monetary Policy Committee come after a series of negative economic data in the wake of the vote to leave the European Union in June.

The MPC was unanimous on the quarter-point cut to interest rates, but it was a split decision to expand the quantitative easing programme, which sees the Bank print money to buy Government bonds, by a further £60 billion to £435 billion.

Expansion of the quantitative easing programme was given a cautious welcome by Birmingham city council leader John Clancy. He said the decision would be “great news” if the new liquidity was spent on infrastructure investment rather than ploughed into share buy-back schemes or pensions funds.

The MPC will also buy £10 billion in corporate bonds and has launched a new ‘Term Funding Scheme’ to make sure banks can pass on the rate cut to individuals and businesses.

It is the first time interest rates have changed since 2009.

Alongside the MPC’s decision, the Bank has published its quarterly inflation report.

That includes drastic cuts to the UK’s GDP forecasts, with the Bank now anticipating “little growth” in the economy through the rest of 2016.

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.

Recent surveys of business activity, confidence and optimism suggest that the United Kingdom is likely to see little growth in GDP in the second half of this year.

The Bank also warned that inflation was likely to be pushed up beyond the two per cent target, and that unemployment would rise.

In a letter to Bank of England Governor Mark Carney, the Chancellor said he was ready to take “any necessary steps to support the economy and promote confidence”.

Philip Hammond, the Chancellor, also released a statement welcoming the MPC’s package of measures. He said:

The vote to leave the EU has created a period of uncertainty, which will be followed by a period of adjustment as the shape of our new relationship with the EU becomes clear and the economy responds to that.

It’s right that monetary policy is used to support the economy through this period of adjustment. That’s why I have authorised the Governor’s request for an increase in asset purchases and a new lending scheme to support the economy, helping ensure that the benefit of low interest rates is passed on by the banks to households and businesses.

As recent figures on jobs and growth have shown, we enter this period of adjustment from a position of economic strength. And the Governor and I have the tools we need to support the economy as we begin this new chapter and address the challenges ahead.

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