Bank of England (BoE) expectedly reduced key interest rate by 25 basis points and increased the program for the purchase of assets by another 60 billion GBP in response to concerns about economy growth after the vote to leave the European Union (EU). The British currency over 1% against the dollar immediately after the announcement of the decision. The members of the Committee on Monetary Policy from the Bank of England unanimously decided to reduce the basic interest rate to 0.25%, as largely step was expected by market participants. This is the first decrease in the key interest rate in the country since March 5, 2009. Then BoE cut interest rate from 1% to 0.5%.
The majority of British central bankers expected interest rates to reach 0% by the end of 2016. Many of them, however, have opposed the decision to increase the volume of the program to purchase assets, which size is increased by 60 billion GBP to 435 billion GBP per month. The increase is valid for next 6 months.
Bank of England launched a new loan scheme and will buy British corporate bonds for 10 billion GBP during the next 18 months. The plans include borrowing up to 100 billion GBP to banks in order to ensure that the measures will extend to the real economy.
The new finance minister of Great Britain, Philip Hammond, welcomed the easing of monetary policy by the BoE. He said it should be used to support the economy.
In addition to lower interest rates, BoE also cut its forecast for economic growth to 0.8% (from 2.3%) in 2017 and to 1.8% (from 2.3%) for 2018. This year’s assessment of growth of 2% remains unchanged, but the third quarter the bank expects expansion in gross domestic product of only 0.1%. BoE changed its expectations for inflation, already expected to be close to the 2% target by the end of the last quarter of 2017.
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