Carney Ready to Cut Rate Again After BOE Eases on Brexit Falloutby
Officials voted 9-0 to cut rate, split on bond-buying plans
Majority of officials expect to take rate lower this year
Mark Carney unleashed a package of stimulus, including the Bank of England’s first interest-rate cut in seven years, and said more easing could come as Britain feels the effects of its decision to leave the European Union.
Officials led by the BOE governor voted unanimously to reduce the benchmark by 25 basis points to a record-low 0.25 percent. They split over other elements of the plan that will expand the central bank’s balance sheet by as much as 170 billion pounds ($223 billion) via purchases of gilts and corporate bonds and a lending program for banks.
“We took these steps because the economic outlook has changed markedly,” Carney told reporters in London on Thursday. “Indicators have all fallen sharply, in most cases to levels last seen in the financial crisis, and in some cases to all-time lows.”
Policy makers slashed growth forecasts by the most ever and Carney declared that all elements of the stimulus can be taken further, including another rate cut. The Monetary Policy Committee’s measures include a plan to buy 60 billion pounds of government bonds over six months, as much as 10 billion pounds of corporate bonds in the next 18 months and a potential 100 billion-pound loan program for banks.
Should their outlook for the economy prove correct, “a majority of members expect to support a further cut in bank rate to its effective lower bound” later this year, they said in a statement. Carney said multiple times that this doesn’t mean rates will be negative.
“The MPC is very clear that we see effective lower bound as a positive number, close to zero, but a positive number,” he said. “I’m not a fan of negative interest rates,” he added, noting that they had produced “negative consequences” elsewhere.
“I give the MPC a lot of credit,” Adam Posen, a former BOE policy maker, said in a Bloomberg Television interview. “They did do a multifaceted policy, they did do the rate cut they needed to do. At the margin I still think they’re a little too optimistic; they’re assuming too much benefit from what they’ve done.”
The interest-rate reduction marks the first change in the benchmark since March 2009, at the height of the financial crisis. The pound slipped 1.5 percent to $1.3121 at 2:45 p.m. London time. It traded at $1.50 on the day of the June 23 referendum.
The easing arrives amid mounting signs that quitting the EU is having an adverse impact on the U.K. economy. While the full fallout hasn’t yet shown up in official data, initial reports show confidence has slumped and industry surveys have weakened.
The central bank cut its growth forecast for next year to 0.8 percent from 2.3 percent and lowered its 2018 prediction to 1.8 percent from 2.3 percent. Weaker investment and consumption were the main drivers, with the BOE seeing business investment falling this year and next, and housing investment dropping 4.75 percent in 2017.
“Recent surveys of business activity, confidence and optimism suggest that the U.K. is likely to see little growth in GDP in the second half of this year,” the BOE said.
This year’s growth forecast was left unchanged at 2 percent. For the current quarter, the BOE predicts an expansion of just 0.1 percent. Carney said that the MPC had been “conservative” in its interpretation of the data.
While the referendum result has darkened the growth outlook, it’s also lowered the pound, pushing up costs for importers and potentially stoking inflationary pressures.
That prompted the central bank to revise up its inflation forecasts, with the projections showing the rate will reach its 2 percent target in the final quarter of next year. In the last set of predictions in May, the MPC saw price growth staying below the goal until the second quarter of 2018.
The BOE plans to look through the currency-driven inflation spike and will take longer than usual to get price growth to target. It said action to counter the pound’s impact would only hurt growth and push up unemployment.
In an exchange of letters with Chancellor of the Exchequer Philip Hammond, Carney said the MPC remained committed to taking whatever action is needed to support growth. Hammond replied that he was also willing to take “any necessary steps to support the economy” and that he would outline his fiscal plans in his Autumn Statement later this year.
The BOE said while it hadn’t made any assumptions about the outcome of the government’s Brexit negotiations or any new trade deals, its forecasts were conditioned on a gradual worsening of the economy’s openness. The forecasts were also based on market expectations for interest rates to fall to as low as 0.1 percent between the fourth quarter this year and the third quarter of 2018.
Of the nine MPC members, external officials Kristin Forbes, Ian McCafferty and Martin Weale opposed the plan to increase the asset-purchase target, saying the initial surveys may overstate economic weakness, and that buying more bonds risked pushing inflation even further above the bank’s goal. Forbes was alone in opposing the plan to buy corporate assets.
“These members felt that any decision to purchase government bonds could be made at future meetings, once more information becomes available,” the minutes showed. Forbes was “particularly concerned about excessive stimulus at this stage, the costs of easing monetary policy and the risks involved in the program,” it said.
The target for asset purchases is now 435 billion pounds, up from an existing stock of 375 billion pounds built up under Carney’s predecessor, Mervyn King, in the wake of the global financial crisis and last raised in 2012.
The BOE’s plan to buy gilts and corporate bonds will be financed by the issuance of central bank reserves. The Prudential Regulation Authority, the U.K. bank regulator, said reserves can be excluded when lenders calculate their total exposure to risk, easing restrictions on their leverage.
Officials intend to purchase sterling, non-financial investment grade corporate bonds “issued by firms making a material contribution to the U.K. economy.”
Thursday’s package builds on the BOE’s strategy for combating the post-Brexit fallout. Financial stability officials have already lowered the countercyclical capital buffer, freeing up as much as 150 billion pounds in additional lending to households and businesses, and the central bank is holding weekly liquidity operations to ease any potential strains.