The Bank of England has cut the base rate to 0.25 per cent, has expanded QE by £60bn and will include corporate bond purchases in QE.
The decision to cut moves the UK’s interest rates to a new record low, and marks the first cut since 2009.
The move to expand QE takes the total stock of these asset purchases to £435bn. Additionally the bank announced £10bn to purchase UK corporate bonds, similar to the ECB’s move this year.
The MPC voted unanimously to cut the interest rate, and the committee said to expect a rate cut to “close to, but a little above, zero” by the end of the year. However, the decision on buying corporate bonds was split, with Kristin Forbes opposing the plan. The decision to boost QE was 6:3 with Forbes, Ian McCafferty and Martin Weale all voting against it.
The Bank said it has launched a Term Funding Scheme to help banks, which will face pressure under lower interest rates.
“As interest rates are close to zero, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn might limit their ability to cut their lending rates.
“In order to mitigate this, the MPC is launching a Term Funding Scheme that will provide funding for banks at interest rates close to bank rate. This monetary policy action should help reinforce the transmission of the reduction in bank rate to the real economy to ensure that households and firms benefit from the MPC’s actions,” says a statement from the bank.
The next MPC meeting is on 3 November, after the BoE moved to only meeting eight times a year. However, it can call an extra meeting before then if it wants to.
Eric Lonergan, macro investment fund manager at M&G Investments, says the move is the “first serious decision Mark Carney has made since becoming governor”.
He described the move to cut by 25 basis points and announce additional QE as a “conventional and relatively dull decision”, although added that the effects of the decision “could be of global relevance”.
Abi Oladimeji, chief investment officer at Thomas Miller Investment, says the decision to cut rates is a step in the right direction but further policy support will be needed.
“Having guided the markets to expect a rate cut, the Bank’s decision to leave rates on hold last month wrong-footed investors. In that context, anything other than a rate cut today would have undermined investors’ confidence in the Bank of England,” he says.
Ahead of the announcement markets were pricing in a rate cut with near certainty. Most commentators expected a 25 basis points cut, bringing rates to 0.25 per cent, and potentially an announcement of more asset purchases.
However, market watchers were more focused on what Carney had to say rather than just on the MPC’s actions, with Carney to hold a press conference after the move.
Architas investment director Adrian Lowcock said: “If Carney comes out with a negative market outlook that would be worse for companies, like banks, rather than what the bank is going to do with interest rates or further QE.
“This is the most priced-in rate cut we have had, but the actual impact on markets would be if they don’t make any move. A quarter rate cut is not significant and it is not a big impact in the economy.”
Chris Williamson, chief economist at IHS Markit, says a rate cut was a “foregone conclusion” following data showing the UK services sector, the most significant part of the economy, has suffered its worst fall in PMI in two decades.
A group of international economists has also called on the UK government to establish a “new collaborative relationship” with the Bank of England in order to create helicopter money in response to Brexit.
In an open letter published in The Guardian, the economists said: “Instead of policies designed to fuel asset price bubbles and increase household debt, the Treasury and the Bank should co-operate to directly stimulate aggregate demand in the real economy.”
In July the MPC voted by a majority of 8-1 to maintain the rate at 0.5 per cent, with one member, Gertjan Vlieghe, voting for a 25 basis point cut.
At the time the committee said it will likely move on interest rates in August, saying “most members of the committee expect monetary policy to be loosened in August”.