£170bn package to support historic interest rate cut
NEW Chancellor Philip Hammond has said he is “prepared to take any necessary steps to support the economy and promote confidence” following the Bank of England’s decision to cut interest rates to a record low.
The Bank’s Monetary Policy Committee has agreed a package of measures that include a quarter-point cut in interest rates to 0.25% and the purchase of £70bn of bonds.
Mark Carney, Governor of the Bank of England, said the UK’s economy needed to find a “new equilibrium” as its moves itself out of the European Union.
The Bank has reduced its growth forecast for the UK next year to 0.8% – down from 2.3%, which it was predicting just weeks before the Brexit vote.
In a letter to Mr Hammond, Mr Carney said the stimulus package was designed to “strike an appropriate trade-off between supporting growth and returning inflation sustainably to the target over an appropriate horizon”.
The Bank of England has a target of 2% inflation, but it is now two years since the rate was near its target. However it expects the fall in sterling – which is down more than 10% against the dollar since the referendum – will result in inflation rising in the near-term and going above that target.
It said there is “a trade-off for the MPC between delivering inflation at the target and stabilising activity around potential”. It believes it is “appropriate” to inject the stimulus into the economy to reduce spare capacity and accept the likelihood of above-target inflation for a period.
The Bank’s Asset Purchase Facility could increase by £170bn to £545bn, with the Chancellor authorising the MPC’s request for £60bn for the purchase of UK government bonds, £10bn for corporate bonds and up to £100bn for the term funding scheme, which is designed to get banks to pass the rate cut onto businesses and households.
The nine members of the MPC were unanimous on the need to cut interest rates to 0.25% and create the term funding scheme. Only one member didn’t support the introduction of the £10bn corporate bond scheme while the decision to buy £60bn of government bonds was agreed on a 6-3 vote.
In a letter to the Bank of England Governor Mark Carney, Mr Hammond said: “The UK starts from a position of economic strength as we address the challenges and take advantage of the opportunities that will arise as we forge a new relationship with the EU.
“The decision to leave the European Union marks the beginning of a new phase for our economy, and while there may be some volatility in the months ahead, we have the tools we need and are well-placed to face these challenges.”
UK interest rates 1975-2016:
