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Bank of England cuts UK interest rate to 0.25%

As widely predicted, the Bank of England has cut the UK interest rate to an all-time low of 0.25%, following seven years at 0.5%. Not so widely predicted was the bundle of additional measures announced simultaneously.

The Bank will purchase an additional £60bn of government debt to ease the economy following the decision to leave the EU. It will also purchase £10bn in high-grade corporate bonds, and provide banks with a substantial incentive to keep lending, despite the lower interest rate.

The decrease in the base rate and additional quantitative easing (QE) has made fixed-rate bonds more attractive to investors, with the UK’s benchmark 10-year gilt yield falling to a record low of 0.63% [1].

Mark Carney, the Bank’s Governor, has been under pressure from economists to bring the rate down and he has humoured them, rather than some past and present members of the Bank’s own Monetary Policy Committee (MPC), in providing a package that goes beyond a mere rate cut.

Dame Kate Barker, who stepped down from the MPC in 2010, believes that a rate cut could weaken bank profits and sterling, and deter – rather than boost – household spending; she would have preferred to see a loosening of fiscal policy. Three external members of the present MPC also demurred at the raising of the QE target.

But the Bank of England has this morning made a strong case for an impending recession, and believes the UK will only hold steady at 2% growth this year. The outlook for 2017 is bleak, with growth forecast at 0.8%, increasing gradually to 1.8% in 2018. Inflation is expected to hit 2.4% in 2018 and 2019.

[1] Financial Times “US stock futures rise as BoE cuts rates” next.ft.com