Exporters face double blow as UK drives down sterling
Published 05/08/2016 | 02:30
The pound plunged yesterday after the Bank of England cut interest rates to an all-time low and unleashed billions of pounds of stimulus in a bid to pull Britain back from the brink of recession.
Acting on its chief economist's wish to use "a sledgehammer to crack a nut", the BoE reduced interest rates by 25 basis points to a record-low 0.25pc and announced further moves aimed at pumping cheap credit into the British economy.
The Bank of England said unemployment in Britain will rise by 250,000, house prices will fall and inflation will go up.
UK growth in 2017 is now forecast at 0.8pc, down from a previous forecast of 2.3pc in May. The pound sterling fell sharply on the news, hitting a three and a half week low of 84.97 pence against the euro.
The UK's first interest rate cut since 2009 was accompanied by a pledge to buy £60bn of government bonds with newly created money over the next six months, and two new stimulus schemes. One will buy £10bn of high-grade corporate debt, the other - potentially worth up to £100bn - is to ensure banks pass on the full rate cut to borrowers.
The bank said most its own policymakers expect to cut interest rates even closer to zero later this year, and sharply downgraded its outlook for growth next year.
"By acting early and comprehensively, the (bank) can reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments in the UK economy," BoE Governor Mark Carney told a news conference yesterday. But doubts were quickly raised over whether the plan will work. Rating agency Fitch said it will "only likely cushion, rather than fully offset", the fallout from June's Brexit vote.
Sterling's fall may boost UK exports, but will still take "a significant toll on the economy", Fitch said.
Davy Stockbroker's Conall Mac Coille said the Bank of England moves will weaken sterling but won't be enough to keep the UK out of recession - a double blow for Irish exporters to Britain who face the prospect of weaker demand and lower prices when they do sell.
MacCoille compared yesterday's 0.25pc rate cut unfavourably to the 5.25pc slashed by the Bank of England in 2008 when the financial crisis struck.
"These amounts (of rate cut) are small beer. Central banks have run out of ammunition," he said.
The BoE's limited room for manoeuvre means the UK government will have to boost spending to maintain economic demand, potentially by tapping the cheap cost of debt to widen its deficit, he said.
UK Chancellor Philip Hammond said he and Mark Carney had "the tools we need to support the economy as we begin this new chapter and address the challenges ahead". (Additional reporting Reuters)