REPORT
By Gökhan Kurtaran
London letter, week beginning August 8

- Another rate cut on the horizon?

Last week the Bank of England (BoE) finally cut rates to 0.25 percent and introduced a package of measures designed to provide additional monetary stimulus for the economy.

In order to save the economy falling into recession, the bank came up with a package: a 25 basis point cut in the bank rate to 0.25 percent; a new term funding scheme to reinforce the change in the bank rate; the purchase of up to £10 billion of U.K. corporate bonds; and an expansion of the asset purchase scheme for U.K. government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.  The last three elements will be financed by the issuance of Central Bank reserves.

Once again following the historic referendum on June 23, Bank of England governor Mark Carney while taking the stage to present the inflation report tried to inject some more hope in the markets. However this may not the final but the first in a range of cuts on the horizon. The Bank's deputy governor, Ben Broadbent said the bank could cut interest rates even further this year if it is deemed necessary.

In Carney’s remarks last year, there were hints of a similar view when he said, “Indeed, if the incoming data prove broadly consistent with the August Inflation

Report forecast, a majority of MPC [Monetary Policy Committee] members would anticipate a further cut in the Bank rate to its effective lower band at one of the MPC’s forthcoming meetings during the course of this year.”

Even though the Monetary Policy Committee does not seem to like the idea of “negative interest rates” at the moment, one more rate cut could be seen at least in the near future.

During the press meeting last week, Carney said the Bank would take “whatever action is needed” to promote financial and price stability.

“Some of the adjustments to this new reality may prove difficult and many will take time. But the U.K. can handle change,” he said.

Perhaps another rate cut might be counted as one of the difficult decisions ahead of Carney.

 

 

08 Aug,2016

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