While Bank of England governor Mark Carney says rate cuts and QE announced today will have an “immediate effect” on the economy, the central bank casts a dim economic outlook including job losses and growth slashed to almost a third of previous forecasts.
However, commentators question whether the stimulus measures announced today are “the right medicine” for a UK post-Brexit.
The BoE cut the base rate to 0.25 per cent and has expanded QE by £60bn to £435bn, with inclusion of £10bn of corporate bond purchases. It also suggested rate cuts could reach close to zero by the year’s end.
Carney said there’ll be “protracted uncertainty” in many sectors post-Brexit, such as within the commercial property markets as “the trading agreements would be unclear for some time”.
In its inflation report, published today, the BoE says following the Brexit decision, the exchange rate has fallen and “the outlook for growth in the short to medium term has weakened markedly”.
The bank says that there’ll be “little growth” in the next months and that it will only pick up next year.
The bank downgraded its forecast for growth next year to 0.8 per cent, down from 2.3 per cent. Overall, the available evidence suggests little growth in GDP in the second half of the year, and growth is projected to slow to 0.1 per cent in the third quarter of 2016, the report says.
The governor notes that spare capacity in the UK will rise, causing unemployment to rise from its current 4.9 per cent to 5.5 per cent over the next two years.
Inflation will also overshoot its 2 per cent target in 2018, rising to 2.4 per cent.
Carney says: “If we hadn’t taken the steps we have taken, output would be lower and unemployment would be lower. We would have achieved a poor balance in returning inflation to target.
“With all forecasts there are risks on either side. We have in actions we have taken, through multiple channels, we have improved the economic outcome for this country. There will be less unemployment.”
Hargreaves Lansdown senior economist Ben Brettel says: “Survey data shows referendum has caused significant uncertainty, and it seems certain some kind of negative shock is on the way. However, sentiment is more volatile than activity, so it’s possible the magnitude of the shock will be smaller than the survey data implies.
“Even if you accept the economy is going to get sick, I would question whether lower interest rates and more QE are the right medicine.”
The BoE also says uncertainty in the UK will weigh on the domestic demand growth and “through trade links, this may reduce activity growth elsewhere”, the bank says.
The report says “elevated uncertainty” and a weaker growth outlook in the United Kingdom will weigh “a little” on the outlook for global growth in the near term, in particular on euro-area export growth.
For this reason, the BoE also expects the European Central Bank to act again and soon on monetary policy.
Additionally, Carney said it is up to the Government to act following Brexit, while the Bank of England will provide stimulus behind it.
He says: “The challenge is to get the economy in a position to it can grow sustainably at a higher rate – those are big structural decisions to be made by governments.
“For savers, pension funds, insurance funds – we can ensure there’ll be a better economic outcome.”
“This is the first responder to a shock. But the biggest element of a change are structural. Importance of negotiation with Europe, have productivity plan for the country and within that context will be the determinacy of the UK long-term prosperity. The BoE will provide the monetary policy support to that.”
UK’s new Chancellor Philip Hammond has welcomed the latest stimulus package. He says: “It’s right that monetary policy is used to support the economy through this period of adjustment.
“As recent figures on jobs and growth have shown, we enter this period of adjustment from a position of economic strength. And the Governor and I have the tools we need to support the economy as we begin this new chapter and address the challenges ahead.”
But Tilney Bestinvest managing director Jason Hollands questions whether the new measures will benefit the real economy.
He says: “The extent to which such actions benefit the real economy as opposed to the financial markets is highly questionable. QE has distorted asset prices, led to gross capital misallocation, arguably at the expense of genuine business investment and risks storing up further problems down the line when all this excess liquidity eventually unwinds.
“Monetary policy is operating at its limits and it is time for a renewed focus on fiscal policy. If the Government wants to signal the UK is open for business and also shore up consumer confidence, it’s time to start thinking seriously about cuts to VAT and corporation tax in the Autumn Statement.”
Prudential Portfolio Management Group senior economist Leila Butt says that the new measures, while supportive, might not be enough to avoid a sharp fall in the economy.
Butt says: “These measures are unlikely to prevent the economy from slowing sharply, as business investment in particular will be hard hit by continued uncertainty regarding the UK’s future relations with the European Union.
“As expected, the Bank of England acted pre-emptively to support the economy, which appears set for a sharp slowdown if not an outright recession. With rates already near the zero lower bound, thus rendering this cut less effective than would ordinarily be the case, the other accompanying measures that the BoE unveiled both today and since the referendum, should provide some marginal support to the economy. “
Fidelity Investments portfolio manager Ian Spreadbury also says encouraging people to borrow when global debt to GDP is already at an all-time high is unlikely to gain much traction.
He says: “If someone is coming up to retirement in the next 5-10 years, with interest rates having come down to such a low level, they are going to need a much bigger capital amount to provide the same income.
“There is a real concern that as rates come down and down, people just say…”I need to save more” and to some degree low rates could have the opposite effect to that intended.”