BoE’s Carney Prepared to Take Action, Dismisses Recession Concerns

Investing.com – The Bank of England (BoE) has reached a new record low for interest rates for the first time in over seven years and announced a series of measures to bolster the British economy. BoE Governor Mark Carney reassured the public on Thursday of the central bank’s commitment to take necessary actions if needed.

Following the United Kingdom’s vote to leave the European Union, Carney explained that the exchange rate has declined significantly, and the short- to medium-term growth outlook has weakened considerably, according to the latest Monetary Policy Committee (MPC) meeting minutes.

The Stimulus Package

To address the economic challenges, the BoE introduced a stimulus package that includes a 25 basis point cut in interest rates, marking its first adjustment since March 2009. The new "term funding scheme" (TFS) aims to ensure that banks transmit this reduction to the broader economy. Additionally, the plan entails purchasing up to £10 billion in corporate bonds and expanding the asset purchase program for U.K. government bonds by £60 billion.

Carney opened his press conference with assurance, acknowledging the potential difficulties stemming from Brexit but asserting that the U.K. can adapt to these changes. While he acknowledged the BoE cannot fully counteract the economic effects of a significant structural shock, he emphasized that “monetary policy can support the necessary adjustments” during this period of uncertainty.

The Economic Outlook

Carney noted that the economic landscape had shifted dramatically, leading to the largest revision of GDP forecasts since the MPC’s inception two decades ago. The BoE has reduced its growth forecast for 2017 to 0.8%, down from 2.3%, and cut the 2018 estimate to 1.8% from the previous 2.3%. The forecast for the current year remains at 2.0%, with only a 0.1% expansion expected for the current quarter.

In response to questions from the media, Carney indicated that the BoE does not anticipate the British economy falling into recession, attributing this optimism to the measures announced, which are expected to enhance the country’s economic prospects.

By acting decisively, the MPC aims to reduce uncertainty, enhance confidence, and mitigate the slowdown while facilitating necessary adjustments in the economy, according to Carney.

Potential for Additional Measures

Carney also indicated that the BoE stands ready to implement further measures if necessary. “All elements of this package have room to be increased,” he stated, reinforcing the central bank’s readiness to ensure monetary and financial stability as the U.K. adapts to its new circumstances outside the EU.

While the option of negative interest rates was raised, Carney made it clear that he is not in favor of this approach. He pointed to other methods available for providing stimulus and mentioned that a further rate cut could occur if economic conditions continue to worsen in the coming months.

Market Reaction

Following the BoE’s announcement and Carney’s subsequent press conference, market activity reflected a shift. The currency traded lower, moving from approximately 1.3326 down to 1.3139, while other market indices also experienced fluctuations. The London stock market, which showed slight losses prior to the stimulus announcements, saw an uptick of 1.34%.