BoE Lowers Rates to Record Low of 0.25% and Expands Purchase Program

The Bank of England (BoE) made a significant decision on Thursday to reduce interest rates for the first time in seven years, reaching a new record low in response to the U.K.’s Brexit vote and plans for an expanded quantitative easing program.

The BoE officially lowered the benchmark interest rate, which had remained at 0.50% since March 2009, in a move that was widely anticipated. This reduction came after a unanimous vote by the committee.

In an unexpected development, the Monetary Policy Committee (MPC) voted 6 to 3 to boost its asset purchase program for government bonds by £60 billion. Analysts had predicted that the existing £375 billion program would remain unchanged.

Moreover, the MPC decided by a vote of 8 to 1 to allocate up to £10 billion for the purchase of corporate bonds. They also introduced a new initiative aimed at providing as much as £100 billion in funding to banks, enabling them to pass the base rate cut to the wider economy.

This new scheme, called the Term Funding Scheme (TFS), will allow the Bank to create new money and offer loans to banks at interest rates close to the newly set base rate of 0.25%.

The BoE indicated that the decision to leave the EU has significantly weakened the short to medium-term growth outlook for the U.K. Consequently, the central bank revised its growth forecast for the following year down to 0.8%, from a previous estimate of 2.3%, and lowered its 2018 estimate to 1.8%.

For the current year, the BoE maintained its growth forecast at 2.0%, anticipating only a 0.1% expansion in the current quarter. The central bank remarked that business activity, confidence, and optimism surveys suggest limited GDP growth for the latter half of the year.

Regarding inflation, the BoE highlighted the depreciation of the pound and its impact on price stability. It now estimates that inflation will reach the 2% target in the fourth quarter of 2017, advancing its prediction which previously suggested it would not achieve this target until the second quarter of 2018.

Following the announcement, the currency was trading at 1.3175, down from around 1.3326 earlier, while another currency changed to 0.8446 from 0.8355.

At the same time, major European stock markets responded positively, with London’s index rising 1.20%, while key indices in other countries also experienced gains.