Bank of England Cuts Interest Rates to Expand Support for the UK Economy

August 4, 2016

The Bank of England has cut interest rates for the first time since 2009 as part of a larger package of support for the UK economy in the wake of Brexit. The reduction from 0.50% to 0.25% was widely expected by analysts.

Supporting the UK economy

The package announced by the Monetary Policy Committee (MPC) of the Bank of England is designed to provide additional support to further stimulate UK economic growth. Economic indicators suggest confidence in the UK is slumping following the vote to leave the European Union. The support package includes:

  • Cutting the official interest rate to 0.25% to cushion the economy.
  • A new term funding scheme to help ensure banks pass on the rate cut to borrowers.
  • An expansion of the existing quantitative easing by committing to purchase an additional £60 billion of government bonds.
  • A separate £10 billion to buy corporate bonds from firms with material impact on the UK economy.

The MPC also noted further action can be taken on all elements of the support package. If economic data proves broadly consistent with the latest Quarterly Inflation Report, a further cut to the official interest rate is expected.

Lower expectations for future growth

In the Quarterly Inflation Report, the Bank of England predicts growth for 2016 will remain at 2.0% following a strong second quarter despite the referendum. UK growth forecasts for 2017 were cut to 0.8% from 2.3%. For 2018, UK growth was cut from 2.3% to 1.8%.

What does this mean for your MD investments?

In general, the impact of today’s announcement is minimal for MD portfolios. The announcement may slightly influence certain companies, currencies, as well as bond yields. Generally speaking, rates are low globally, which may continue to provide further gains in equity markets. This would be supportive of MD’s tactical asset allocation overweight to equities. We will continue to monitor the situation.

We encourage you to contact your MD Advisor if you have any questions.

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