Britain's central bank cuts interest rate, forecasts weaker growth

The Bank of England announced the first interest rate cut since 2009 on Thursday, reducing the base lending rate from 0.5 per cent to 0.25 per cent amid warnings of a rise in financial risks since Britain's vote to leave the European Union.

Bank governor Mark Carney said the decision "follows signs of a slowdown in the economy" since the Brexit referendum on June 23, adding that the bank could cut the interest rate again this year.

The central bank's monetary policy committee said it had agreed to the interest-rate cut in a package of measures "designed to provide additional support to growth and to achieve a sustainable return of inflation to the target."

Other measures include using central bank reserves to buy corporate bonds valued at up to 10 billion pounds (13 billion dollars) and expanding an asset purchase scheme for government bonds by 60 billion pounds, it said in a statement.

"The purchase of corporate bonds will support the real economy by directly affecting financing conditions for companies that make a material contribution to UK economic activity," Carney said.

Chancellor of the Exchequer Philip Hammond welcomed the bank's measures and said his government is "prepared to take any necessary steps to support the economy and promote confidence."

"The vote to leave the EU has created a period of uncertainty, which will be followed by a period of adjustment as the shape of our new relationship with the EU becomes clear and the economy responds to that," Hammond said.

"It's right that monetary policy is used to support the economy through this period of adjustment," he said.

The bank said a recent fall in the British pound against the dollar was likely to push up consumer inflation in the near term, forecasting "little growth" in the country's economy for the rest of this year.

It highlighted problems including "a downward revision to the economy's supply capacity," and weak demand leading to spare capacity and an eventual rise in unemployment.

The rate cut was in keeping with most analysts' expectations.

The bank had been expected to cut the rate in mid-July, but it held off after saying markets had initially "functioned well" since the referendum, despite a sharp fall in the currency.

Carney had hinted earlier that interest rates could be cut over the summer and warned Britain to expect long-term uncertainty that could "weigh on our economic prospects for some time" following the Brexit vote.

The bank's financial policy committee had also warned that the fallout from the referendum was likely to increase risks including a potential drop in foreign direct investment, and rises in household debt and unemployment.

Last update: Thu, 04/08/2016 - 15:57
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