Bank of England wields stimulus 'sledgehammer' to beat Brexit blues

Thu Aug 4, 2016 1:20pm EDT
 
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By David Milliken and Ana Nicolaci da Costa

LONDON (Reuters) - The Bank of England cut interest rates to next to nothing on Thursday and unleashed billions of pounds of stimulus to cushion the economic shock from Britain's vote to leave the European Union.

Acting on its chief economist's wish to use "a sledgehammer to crack a nut", the BoE reduced interest rates by 25 basis points to a record-low 0.25 percent.

This first cut since 2009 was accompanied by a pledge to buy 60 billion pounds ($79 billion) of government bonds with newly created money over the next six months, and two new stimulus schemes. One will buy 10 billion pounds of high-grade corporate debt, the other - potentially worth up to 100 billion pounds - is to ensure banks pass on the full rate cut to borrowers.

The Bank said most BoE policymakers expected to cut the main interest rate to even closer to zero later this year, and sharply downgraded its outlook for growth next year.

"By acting early and comprehensively, the (Bank) can reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments in the UK economy," BoE Governor Mark Carney told a news conference.

Sterling fell as much as 1.6 percent against the dollar following the announcement, while British government bond yields hit record lows and the main share index rose by 1.6 percent.

Carney said he had unveiled an "exceptional package of measures" because the economic outlook had changed markedly following the Brexit vote. The Bank expects the economy to stagnate for the rest of 2016 and suffer weak growth next year.

By cutting rates to the lowest in its 322-year history, the BoE joins the Bank of Japan and the Reserve Bank of Australia, which both undertook unprecedented stimulus in the past week.   Continued...

 
A sign is displayed outside the Bank of England in London, Britain August 4, 2016.   REUTERS/Neil Hall