Lowest Ever Interest Rates by Bank of England, What it Unfolds…

The apex bank has announced a 25 basis point rate cut for the first time since 2009. Also, this is the lowest ever Interest rate by BoE since its very inception in 1694. Along with it apex bank also announced £ 170bn package for additional measures which included £70bn Bond buying programme and £100bn cash injection in the Banking Industry with the aim to stimulate the economy. The step was taken after the people in EU voted in favour of Brexit referendum which aims at providing the cushion to the Economy throughout its journey in near future. The bond yields are at their lifetime low & the growth forecasts by the BoE for 2017 is 0.8% down from previous forecast of 2.3% in May, which was put in before the vote in favour of Brexit.

The infusion of liquidity into the system will definitely provide support to increased consumer spending as the availability of money in the system will be more. The argument is strengthened by the fact that the BoE has established a new Term Funding Scheme for banks that would provide up to £100bn from central reserves to offset the hit to banks’ margins from the cut. Increased spending by consumers will surely help in sustaining the demand as well as inflation which will be driving the growth as it is always the priority for a developed economy and in our case with an expected disruptive event happening in future the importance of growth and stability increases for sure.

But at the same time was the cut really required when the recent data is promising for your country. Recent data showed unemployment hitting a 11-year low, House prices are still rising, average wages are going up at slightly more than 2% — not fantastic, but respectable when inflation is close to zero. Also, Britain may well negotiate full or partial access to the single market, in which case most companies will hardly notice the difference.

What happens when you take an economy running at capacity and stimulate it? It starts to overheat. According to me what BoE could have done is wait for more painful signals if any, by the economy in the aftermath of the event.

The referendum has surely taken a knock at the economy but was the rate cut required? Only the time will tell…

Authored By:

Pavan Rajkumar Agrawal

SBM, NMIMS, Mumbai

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