MercoPress. South Atlantic News Agency

UK admits economy contraction and announces a bold package of stimulus measures

Bank of England also announced a program of cheap lending to banks to make sure they are financially able to in turn lend to people and businesses at low rates.

The Bank of England has unveiled a series of stimulus measures in the wake of Brexit, including its first interest rate cut since the global financial crisis (2009), as it tries to jumpstart an economy shocked by Britain’s vote to leave the European Union.

 The central bank cut its key rate to 0.25% from a previous record low of 0.5%. It is also restarting its bond-buying stimulus program to pump an additional 60 billion pounds (US$79 billion) in new money into the economy. It will buy up to another 10 billion pounds in U.K. corporate bonds – or bonds sold by companies to finance their activities – to help them borrow more cheaply.

The Bank of England further announced a program of cheap lending to banks to make sure they are financially able to in turn lend to people and businesses at low rates.

“This is the appropriate response to the economic conditions we find ourselves in,” the Bank of England’s governor, Mark Carney, told a news conference.

He added that all of the measures “have scope for further action.” That includes another cut to interest rates “close to, but a little above, zero” if incoming economic data proves broadly consistent with the new forecasts the Bank of England compiled Thursday.

The measures seemed to exceed the expectations of investors. The value of the British pound fell sharply on the news, as lower rates tend to weigh on a currency.

Thursday’s decision underscored the bank’s concern about an economy that has taken a sharp turn lower since the vote to leave the EU, which creates uncertainties for businesses about the country’s future trade relations with the rest of the bloc. Early indicators since the June 23 vote suggest that the economy is contracting at its sharpest rate since 2009.

Some experts argue there is only so much the central bank can do to help the economy – that even with lower interest rates, businesses and households will remain worried about the future so long as the Brexit talks with EU drag on.

Treasury chief Chancellor Philip Hammond hinted a fiscal boost was possible, saying in a letter to Carney on Thursday that he was “prepared to take any necessary steps to support the economy and promote confidence.”.

The central bank slashed its growth forecasts from next year onwards, underscoring the contraction underway. It predicted the economy would grow only 0.8% next year, compared with the 2.3% it had previously predicted. The cut its forecast for 2018 to 1.8% from 2.3%.