The Governor of the Bank of England Mark Carney has announced a drop in the base UK interest rate to a new record low of 0.25 percent from 0.5 percent.
It is really a token gesture which is unlikely to help the economy much in the current situationFormer BoE Monetary Policy Committee member
In an effort to protect the British economy from the negative effects of Britain’s referendum vote to leave the European Union, Carney announced the first drop in interest rates since March 2009.
He also said they will boost quantitative easing, buying 60 billion pounds (70 billion euros) worth of government debt over the next six months.
Quantitative easing is money printing to put cash into the economy and stimulate it.
It addition it will purchase corporate bonds and launch measures to ensure banks keep lending to businesses and individuals, even after the cut in interest rates.
The bank said it expects the UK economy to stagnate for the rest of this year and suffer weak growth throughout next year.
Carney said the UK’s central bank will take “whatever action is necessary” adding that the effects of the lower interest rates will be felt immediately in the economy.
He told journalists that based on indicators of risks to the economy: “There is a clear case for stimulus, and stimulus now, in order to have an effect when the economy really needs it.”
The Governor also made it clear the members of the Bank’s Monetary Policy Committee would not hesitate to cut the benchmark interest rate close to zero is needed.
Andrew Sentance, a senior economic adviser at PwC and former member of the Bank of England’s Monetary Policy Committee echoed Carney when he said the real heavy lifting to help the UK’s economy has to come from the government: “This cut in interest rates was widely expected, but it is really a token gesture which is unlikely to help the economy much in the current situation. Savings rates are already near-zero and borrowing costs for business and homeowners are extremely low.”
Sentance added: “The pound could well weaken further, adding to inflation and business costs. The margin banks earn on their lending is likely to be squeezed, creating new pressures in the financial system.”
In response to the Bank’s measures, shares on the London Stock Exchange rose and the pound fell further against the US dollar.