Bank of England Cuts Rates to Fight Brexit Slump

The British voter has decided that Britain should leave the European Union, convinced that the UK can be better outside the club. The Bank of England has just cut interest rates for the first time since March 2009, and the UK base rate is now 0.25%. In addition, the BoE is going to buy £60 billion of UK government bonds and £10 billion of corporate bonds to increase the money supply. Also, it has a £100 billion plan to get the banks to pass on the low interest rate to individual and corporate borrowers. The reason for all of this is simple; the British economy has been hit hard by Brexit related uncertainty.

The BBC notes, “The Bank also announced the biggest cut to its growth forecasts since it started making them in 1993. It has reduced its growth prediction for 2017 from the 2.3% it was expecting in May to 0.8%.” Kamal Ahmed, one of the Beeb’s economics editors, stated, “The economy, it [the BoE] says, will be 2.5% smaller in three years’ time than it believed it would be when the Bank last opined on these matters in May. Unemployment will rise (although only marginally), inflation will rise, real income growth will slow and house prices will decline. Growth, the Bank believes, will fall perilously close to zero over the final six months of this year.”

The rate cut, however, is not all good news for Britain. Daniel Mahoney, head of economic research at Centre for Policy Studies, said, “The Bank’s further loosening of monetary policy could prove problematic for the UK economy. The falling pound means that inflationary pressures are already building up, and today’s decision will exacerbate them.” In other words, Britain’s economy, which is so open to foreign trade, will suffer in some sectors because of this attempt to keep the entire economy afloat. The good news on the inflation front is that Britain is below target on this, and so, that metric won’t get any worse.

Scott Corfe, director of the Centre for Economics and Business Research, told the BBC, “Even with this stimulus, CEBR expects economic growth to slow from about 1.5% this year to less than 0.5% in 2017. A recession – at least a couple of quarters of negative growth – will be difficult to avoid and unemployment is likely to rise from current levels.”

Lucy O’Carroll, chief economist at Aberdeen Asset Management, stated, “The Bank really needed to announce this kind of combination of measures. What will really count is whether the chancellor provides a fiscal boost in the autumn. Monetary policy can’t do much more on its own.”

Chancellor Philip Hammond wrote in response to a BoE communication about the rate cut, “Alongside the actions that the Bank is taking, I am prepared to take any necessary steps to support the economy and promote confidence.”

Of course, the government could pass an emergency budget to help out on the fiscal side this autumn. For reasons political and ideological, however, the Tories won’t do that. They have been the party of austerity since the economic collapse of 2007-8, and they aren’t about to start doing economics correctly now. Balancing the budget seems to still be their main objective no matter how badly Britain suffers.

Mr. Hammond may offer some kind of stimulus, but it will be insufficient to undo the damage that the Brexit vote has caused. Moreover, one must remember that this downturn is merely based on the uncertainty that the referendum’s result has created. The actual shape of the UK-EU relationship is undetermined, and when the details come out, the markets will react to each bit of bad news by taking cover rather than taking risks. If there is any positive benefits to Brexit economically, they are years away. The negative results are already arriving, and policy makers are not going address them. God help Britain because no one else seems to be in a position offer any aid.