LONDON — Britain’s vote to leave the European Union has forced Bank of England governor Mark Carney to slash the country’s historically low interest rate in half in a bid to stimulate the economy, which has begun to show signs of a slowdown since the historic June 23 vote.
The Bank of England’s Monetary Policy Committee is sticking to its inflation target of 2 percent, and the interest-rate cut — the first since 2009 — is the cornerstone of its efforts. The bank is also planning asset purchases of 435 billion pounds, or $580 billion, to be financed by issuing central bank reserves, in an effort to get the economy moving.
The bank cited the Brexit vote as a major factor in its decision to reduce the rate at which banks lend to one another and the borrowing costs for households and businesses. “The exchange rate has fallen and the outlook for growth in the short to medium term has weakened markedly,” the bank said Thursday.
“The fall in sterling is likely to push up (inflation) in the near term, hastening its return to the 2 percent target, and probably causing it to rise above the target in the latter part of the forecast period, before the exchange rate effect dissipates thereafter.”
The bank noted that the period of above-target inflation would only be temporary, and it expects the eventual return of inflation to the target.
The bank added that it foresees an eventual rise in unemployment and that the U.K. is likely to see little growth in gross domestic product in the second half of this year. It also downsized its growth forecast for 2017 to 0.8 percent from the 2.3 percent it had announced in May.
Earlier in the day, European stock markets had edged up in anticipation of the rate cut. After the reduction was revealed, the FTSE 100 jumped 1.3 percent to 6,723.12 and other markets built on gains from earlier in the day.
Following the announcement, the pound dropped 1.5 percent against the dollar, and 0.7 percent against the euro. The pound was trading at $1.32, and 1.18 euros.
The London consultancy Verdict Retail said in a report following the announcement that the rate cut will do little to stimulate retail sales.
“With the immediate impact of the interest-rate cut being a drop in the value of the pound, this move is hardly likely to boost flagging consumer confidence, which is a major factor in driving spend,” wrote Nivindya Sharma, senior analyst at Verdict Retail, in a research note.
“In addition, consumers will see returns on savings fall yet further. In theory, this is supposed to stimulate spend by making it less desirable to save, but there seems little evidence this has worked up to now.”
Not only is the interest rate cut not a magic potion, “it could actually create even less confidence in the economic outlook,” Sharma added.