Interest rates have been slashed to a new historic low of 0.25 per cent and the Bank of England has pushed the button on another £170 billion of monetary stimulus to stop the economy sliding back into recession in the wake of the UK’s Brexit vote.
Unveiling its most drastic set of GDP growth forecast downgrades in its modern history, the Bank said the UK economy will virtually grind to a halt in the wake of the Brexit vote – coming perilously close to another recession.
The Bank’s forecasts include the positive impact of today’s stimulus package, implying the UK economy would otherwise have returned to recession this year for the first time since the 2008-2009 financial crisis.
Instead, the Bank is now expecting quarterly GDP growth to slump to just 0.1 per cent in the third quarter of the year – and to eke out roughly the same meagre output in the final quarter.
A recession is defined as two consecutive quarters of negative growth and the Bank of England’s Governor Mark Carney, provoked the fury of pro-Leave campaigners when he warned that a “technical recession” was a possible consequence of a Brexit vote in the referendum campaign.
Even so, the Bank said cumulative GDP growth over its forecast horizon is 2.5 per cent lower than forecast in the Bank’s May Inflation Report – the biggest three monthly downgrade in the Bank’s modern history of forecasting since the central bank was made independent in 1997.
The downgrade implies a roughly £45bn hit to the economy over the next three years as a direct result of the Brexit vote (the equivalent of a £1,750 loss for each of the country’s 26 million households).
The minutes of the Bank’s latest Monetary Policy Committee meeting also strongly suggest interest rates could be cut still further to just over zero later this year if the economy continues to weaken in the coming months, as widely expected.
As well as the cut in its base rate, the first since March 2009, the Bank has authorized a further £60bn of government bond (Gilt) purchases, £10bn in corporate bond purchases and a new scheme to ease the funding costs of banks potentially worth up to £100bn.
This will all be funded by money printing by the central bank, adding up to a £170bn stimulus package – the biggest individual support scheme rolled out by the Bank since the depths of the global financial crisis.
The impact on the economy of the Brexit vote shock and the deep uncertainty it has created are expected to be severe by the Bank.
Average house prices are expected to decline over the next year, after years of strong growth.
Unemployment is expected to start rising again, after steady falls since 2009, hitting 5.6 per cent.
Business investment collapses, contracting both this year and 2017 as firms draw in their horns.
Inflation overshoots the Bank’s official 2 per cent target, rising to 2. 4 per cent in the second half of 2018, but the MPC said it would “tolerate” this because it would be only temporary.
One in five Britons with mortgages are on “tracker” deals, and can expect an instant fall in their monthly repayments, with more to come if the Bank cuts rates again later this year.
Millions of people on “standard variable” rates could also benefit, depending on the nature of their individual deals. However, the half of mortgage borrowers on fixed rate deals will see no immediate benefit.
There was some dissent on the nine-person MPC committee over the stimulus package. While all voted for the rate cut and the subsidy scheme for banks’ funding costs, there was only a 6-3 majority in favour of restarting Gilt purchases and 1 member, Kristin Forbes, voted against corporate bond purchases.
The corporate bond purchases, on this scale, are a new departure for the Bank as a means of stimulating demand in the economy.
Officials said that only firms that make a “material contribution” to the UK would be eligible to have their bonds acquired by the central bank acquired and their borrowing costs, thereby, reduced over the next 18 months.
The Bank said the purpose of the £100bn subsidy to lenders’ funding costs through a “Term Funding Scheme” was to offset the negative impact of the cut in the base rate on their profit margins and the risk that this would result in banks cutting lending to households and firms in response.
Last week Royal Bank of Scotland had threatened to start charging its business customers for holding cash on deposit if the Bank cut the base rate in -negative territory.
In a letter to Mr Carney approving the increase in the Bank’s money printing programme (which is underwritten by the Treasury) the new Chancellor, Philip Hammond, said: “I am prepared to take any necessary steps to support the economy and promote confidence”.
There have been numerous calls for Mr Hammond to compliment the Bank’s monetary stimulus with a fiscal stimulus of tax cuts or increased infrastructure spending in the Autumn Statement.
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