Perhaps understandably, Threadneedle Street has decided to go for the all-action approach. It was slow to react to the great recession of 2008 and 2009, and was not going to be accused of making the same mistake twice. The risks of doing nothing were higher than the risks of providing oodles of fresh stimulus.
To be sure, the Bank could have waited until it had more evidence of how the economy was doing post Brexit. But changes to policy take time to work, so the case for early and aggressive action is strong. As Mark Carney put it, there is a case for stimulus and there is a case for stimulus now.
The backdrop to the four-part package is the assumption that there is going to be a marked slowdown in activity as a result of the 23 June referendum. Recession is avoided, but only just and only because the Bank’s nine-strong monetary policy committee (MPC) assumes that lower interest rates, a new scheme to encourage commercial banks to pass on lower borrowing costs and £70bn worth of additional money creation will boost activity over the coming months and years.
Even so, the Bank has cut its growth forecast for 2016 to 2018 by a cumulative 2.5% of GDP. That represents the biggest ever downgrade between any two of its quarterly inflation reports that have been produced for the past 23 years.
Markets were expecting a cut in the bank rate to 0.25% and they duly got it. Nor did it come as a real surprise that the MPC agreed – albeit with some dissenting voices – to restart the Bank’s asset purchase programme. It will buy £60bn worth of government bonds and £10bn of corporate bonds in the hope that this will increase the money supply, drive down interest rates and discourage the hoarding of cash.
Of the four elements of the package, the new “term lending scheme” was perhaps the most eye-catching and may prove to be the most effective. It is designed to deal with one of the problems caused by ultra-low interest rates - that banks find it harder to make money because the margin between their borrowing and lending rates is squeezed.
The Bank will provide up to £100bn of funding for commercial banks at interest rates close to the new 0.25% bank rate. If banks cut back on their lending, the funding will become slightly more expensive.
The MPC has also left something in reserve. A further cut in interest rates to 0.1% has been signalled for later in the year, and there is the option of buying even more gilts or corporate bonds.
As far as the City was concerned, the scope of the package more than met expectations. That’s not to say the Bank is without its critics. One group says that it is unrealistic to expect a shaving of official interest rates from an already-record low and a bit more quantitative easing to do all that much. Another group says that if the Bank does stimulate more activity then it will be the wrong sort of debt-fuelled growth. A third warns that the measures could prove counter productive, because they lead to a weaker pound, higher inflation and lower living standards.
All these criticisms have merit, as does the argument that Britain’s real problems – poor productivity, under-investment, inadequate physical and human capital – cannot be cured by cheap money and QE.
The Bank would agree. Its message is clear: we are doing our bit to support the economy. It is now up to others - ie the Treasury - to shoulder some of the burden.
In that respect, the letter written by the new chancellor, Philip Hammond, to the Bank’s governor, Mark Carney, was telling. “Alongside the actions the Bank is taking, I am prepared to take any necessary steps to support the economy and promote confidence.” It doesn’t sound as if the Treasury will sit tight either. An autumn of economic fireworks beckons.
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