Bank of England Does Reduce Interest Rates To Stabilize Economy After Brexit Vote

It’s been seven years since the Bank of England cut interest rates, but in response to the June 23 Brexit vote, the agency voted to cut interest rates. It will also bring back a broad stimulus program to keep the U.K economy from falling into a recession.

The central bank decided to take action after it slashed its growth forecast by a huge margin in close to 20 years. With the first analysis of the Brexit economy shock, it was predicted that the following things would happen:

  • High unemployment – a job loss of 250,000 people even when stimulus measures are enacted

  • Small economy – Output would be 2.5 percent less by end of 2018 than previously forecasted in May.

  • Price increase – Inflation hits 2.4 percent – steep drop in pounds will push import costs up.

The Bank of England reduces interest rates to 0.25 percent, which will help in reducing homeowners’ mortgage payments and help companies to borrow more for a time. However, pension funds and savings are bound to feel the pinch.

According to the bank, $92 billion would be pumped by into the economy. The money would be printed to purchase bonds that British government issues and roughly 150 companies. Since July 2012, the quantitative easing program, which is worth was £375 put on hold. Banks will also have a new £100 billion funding program to keep their profit margins from hurting due to the vastly low-interest rates.

The bank said since the UK voted to leave the EU, its exchange rate fall and there is a weak growth outlook for the short and medium terms. According to the latest business activity surveys, optimism and confidence suggest the UK will see very little GDP growth during the second part of the year.

The majority of economists expected a rate cut, but few thought the bank would hold off doing anything until the government revealed its new tax and spending plans.

According to Mark Carney, Bank of England governor, said the bank could print more money should the economic issue fail to improve. However, he said he wouldn’t support any notion of negative interest rates – something seen in Japan and Europe.

 

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