UK Set to Tighten Monetary

Monetary policy Bank of England

The pound fell for a second day after the Bank of England cut interest rates for the first time since March 2009, part ...The pound fell for a second day after the Bank of England cut interest rates for the first time since March 2009, part of a suite of stimulus measures to help boost the economy. Simon Dawson by Chad Bray

The Bank of England said it would cut its main interest rate to its lowest point ever and expand other measures to bolster Britain's economy over concern that the country's decision to leave the European Union could weigh on growth.

The move comes at a time of widespread uncertainty about the longer-term impact of the vote to leave the bloc, known as Brexit. It is unclear what Britain's future trading relationship will be with the European Union and, crucially, how much access London's prized financial services industry will have to the Continent. The referendum also unleashed a summer of political turmoil that led to a new government and to questions about the new leadership's economic policies.

The short-term impact, however, has been largely negative. In the weeks since the vote, the pound has fallen sharply, and stocks in a number of sectors, including banking and construction, have been under pressure. Several real estate funds suspended withdrawals as investors tried to pull out their cash, fearing a slowdown in the British property market.

Surveys in recent weeks also indicated that consumer confidence, services output and purchasing-manager sentiment had plummeted. The International Monetary Fund has cut its growth forecast for Britain's economy, which had been one of the region's strongest since the financial crisis.

"There is a clear case for stimulus, and stimulus now, in order to be there when the economy really needs it - to have an effect when the economy really needs it, " governor Mark Carney told reporters on Thursday.

Carney also signalled Thursday that the committee could cut rates further this year, but he ruled out the possibility of negative interest rates. The committee's next meeting is set for November.

The bank also said that it would introduce a series of additional measures to support the economy, predicting that there would be little growth in the second half of this year and that economic growth would decline sharply next year compared with its earlier forecast for 2017.

"This is a timely, coherent and comprehensive package of measures, " Carney said. "It is appropriately sized given the scale of the shock, the uncertainties about the degree of the adjustment and the relatively limited data."

Economic slowdown accelerating

Those measures included increasing the size of a bond-buying program, part of a policy known as quantitative easing, which is intended to cut market interest rates and stimulate the economy.

The bank said Thursday that it would buy an additional £60 billion ($103.2 billion) in assets under the program, increasing the total to £435 billion.

The Bank of England also said that it would buy up to £10 billion in investment-grade corporate bonds from non-financial companies. It stipulated that the bonds must be traded in pounds and that the companies must be "making a material contribution" to the British economy. The new private-sector bond buying program is expected to begin next month.

The bank will choose from a pool of about 150 companies, accounting for about £150 billion in corporate bonds, according to Minouche Shafik, the central bank's deputy governor for markets and banking.

The central bank also said it would start a program to make it easier for banks to provide lower lending rates to households and businesses, and would penalise the banks if the net level of lending fell.

Carney has previously cited the continuing uncertainty as a potential drag on the economy, possibly leading to tighter financial conditions and affecting Britain's major trading partners. And in recent weeks, a series of indicators have pointed to a sharp slowdown.

"Demand is expected to be markedly weaker, and unemployment higher, than projected in May, " Carney said Thursday in a letter to Philip Hammond, the chancellor of the Exchequer.

Inflation to rise, paced by weak currency

Lucy O'Carroll, chief economist at Aberdeen Asset Management, said Carney was clear in his message Thursday that monetary policy could go only so far in supporting the economy in light of the uncertainty created by the Brexit vote.

"What will really count is whether the chancellor provides a fiscal boost in the autumn, " O'Carroll said, referring to a planned budget update this year. "Monetary policy can't do much more on its own."

In cutting its economic growth forecasts for the coming years, the central bank Thursday said it expected the economy to grow about 2 per cent in 2016, but at a slower rate in the second half of the year.

It projected gross domestic product would grow at 0.8 per cent in 2017, and 1.8 per cent in 2018. It had predicted the economy would expand 2.3 per cent in each of those years.

It was the biggest downgrade between inflation reports since the central bank began making public forecasts in 1993.

The central bank also said it believed that the annual inflation rate over the next three years would surpass its policy target of 2 per cent, reaching 2.4 per cent in 2018 as a weak currency pushed up the prices of imported goods and services.

The bank sees a 2 per cent inflation rate as a sign of healthy economic growth. Twelve-month consumer price inflation stood at 0.5 per cent in June.

Source: www.afr.com
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