Governor of the Bank of England Mark Carney hosts a quarterly Inflation Report press conference at the Bank of England in central London, Britain August 4, 2016.POOL/Reuters
Bank of England Governor Mark Carney has launched the most aggressive monetary stimulus Britain has seen since the depths of the Great Recession seven years ago to cope with a deteriorating economic picture and a dramatic drop in confidence in the wake of Britain's shocking Brexit vote.
"We took these steps because the economic outlook has changed markedly," Mr. Carney told a news conference after Thursday's decision by the bank's monetary policy committee. "Indicators have all fallen sharply, in most cases to levels last seen in the financial crisis, and in some cases to all-time lows."
The central bank slashed its forecast for economic growth next year to a dismal 0.8 per cent from 2.3 per cent – an unprecedented revision. It now expects growth in 2018 of 1.8 per cent, down from its pre-Brexit forecast of 2.3 per cent.
The gloomy new assessment confirms the warnings of vocal Brexit opponents and government officials – including Mr. Carney – in the weeks leading up to the fateful referendum in June.
The BoE reduced its benchmark interest rate by a quarter of a percentage point from an already record low of 0.5 per cent, boosted its existing bond-buying program by £50-billion ($85-billion) to £75-billion and decided to add as much as £10-billion worth of bonds issued by companies "making a material contribution to the U.K. economy."
To encourage commercial banks to pass on lower rates to customers, the BoE will also make available up to £100-billion in new funding for those making cheaper loans.
The moves, including the hefty boost in quantitative easing (QE) to as much as £435-billion, mark the bank's first major policy response to the fallout from the June 23 referendum.
Mr, Carney sent a clear signal Thursday that the BoE is prepared to do still more to buffer the economy from future blows. And he will have to if the worst fears about the Brexit impact become a reality.
Indeed, at least a mild recession now seems inevitable, even if the government delays starting the lengthy process to quit the European Union.
The bank's moves "are unlikely to be enough to prevent the U.K. from entering a technical recession," James Knightley, a senior economist with ING, said in a note to clients headlined "BoE's sledgehammer stimulus."
At their previous meeting just three weeks ago, policy makers left rates unchanged, saying they needed more evidence of economic weakness before acting.
Mr. Carney is known to have favoured strong pre-emptive action to cushion the economy from the Brexit fallout, but didn't want a deep split on the sometimes fractious nine-person monetary policy committee (MPC). Then came the release of depressing business surveys for July, heralding a sharp contraction in manufacturing, construction and services. Added to the bank's own revised forecasts, they made for a compelling case.
The Governor established his reputation for bold pre-emptive measures for his early response in 2008 to the developing global financial hurricanes when he was at the helm of the Bank of Canada.
Analysts expected Thursday's rate cut, but were surprised by the extent of the other actions, which were not universally welcomed by more hawkish members of the MPC.
Policy makers voted unanimously for the lower benchmark rate. But three of the four non-BoE members, including Massachusetts Institute of Technology professor Kristin Forbes, opposed the additional QE. They said recent grim surveys may be painting an overly dark portrait of the economy and would like more hard evidence of a downturn.
Prof. Forbes was the only naysayer on the decision to buy corporate bonds.
The market response was rapid and predictable, as the pound weakened and money poured into British equities.
The drop in the value of the currency will increase inflation, but the bank expects that the weaker economy will keep any inflationary pressures in check in the medium term.