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Bank Of England Cuts Interest Rates In A New Stimulus Package

There have been a lot of speculations regarding the steps that the Bank of England would take regarding UK's economy after the Brexit vote to leave the European Union. Similarly, the domestic currency, the British Pound, has seen a decline in strength compared to other major world currencies after the Brexit vote. The Great Britain Pound has seen a very sharp decline in its strength in the past few weeks reaching almost to its 30 year low. This has greatly affected the trade sector since it means more money for imports and less money from exports.

After the Brexit vote to leave the EU and the deterioration of the British economy, the government of United Kingdom has been looking for means and ways of ensuring that UK doesn't get back into recession. In line with this, the Monetary Policy Committee (NYSE:MPC) had to come up with a solution towards the current inflation and growth of the domestic economy.

On 9th September, 2016, the Bank of England made the decision of the Monetary Policy Committee to reduce the interest rate by 0.25% public. This was in an attempt to save the economy from recession. This decision was made in a monetary stimulus package.

What is the monetary stimulus package?

The Bank of England stimulus package is solely intended to support the economy and avoid a recession following the Brexit vote to leave the European Union.

It includes:

  • A £60 billion to the quantitative easing programme of the UK's government that is anticipated to take its asset stockpile purchases to £435 billion in the next 6 months,
  • Purchases up to £10 billion of high quality corporate debt from a foreseen contributors estimated at £150 billion so as to bring the funding cost down. Policymakers said that the purchase of such bonds could provide a better stimulus as compared to a similar amount of gilt purchases.
  • A Term Funding Scheme that is worth £100 billion so as to give the commercial banks a chance to borrow a fraction of their outstanding lending for a period of 4 years at about 0.25%.

The whole stimulus package is set to be funded by newly printed money by the central bank.

The pound tumbled and plated yields dropped to new lows after the Bank took the markets by surprise by expanding its cash printing program with purchases of government and corporate bonds in conjunction with the first cut of the interest rates in a period of seven years.

In what financial specialists depicted as an "intense reaction" to a normal UK economy recession, policymakers collectively voted to slice rates to 0.25%, from a past record low of 0.5%.

The policymakers also were for the opinion that they could still vote in favor of a further interest rate cut towards zero in a couple of months to come. Financing prices had beforehand been held at 0.5pc since March 2009.

While policymakers expect "little development in GDP in the second 50% of this current year", the Bank's Inflation Report conjectures demonstrated it anticipates that the economy will develop by 0.1% in the second quarter compared to the last quarter, and to grow marginally in the last three months of the year.

This would see the UK a two back to back quarters of an economic decine, otherwise known as a technical recession. The domestic growth in 2017 is currently at 0.8%, down from a past gauge of 2.3% in May.

The Bank of England figured that the Brexit vote had "conservatively" thumped 2.5 % off development throughout the following three years, even in the wake of representing the boosting measures it declared.

The National Institute of Economic and Social Research Policies computed that the Bank's strategy measures could animate the economy by as much as 0..5% throughout the following two years.

Policymakers cautioned of higher unemployment, falling mortgage prices and contracting business speculation after the choice to leave the EU.

The minutes of their meeting additionally demonstrated that a "larger part" of individuals trusted that "a case could be made for cutting the Bank Rate "instantly" to simply above zero, in spite of the fact that they chose to sit tight for additional proof.

What does this monetary stimulus package mean for the financial markets?

In most cases any monetary stimulus package affects both the country's economy and the financial markets.

To the economy, the stimulus package acts as a boost of the products and services markets. The Businesses, consumers as well as investors become more hopeful of a better financial world. This is however a short lived effect and it is mainly psychological.

To the financial markets, the effect is so direct and real that it needs no analysis to see the markets reacting. This is because there are some institutions and businesses that typically receive money inflow from the specific stimulus.

The pound fell by as much as 1.6% to $1.3112 against the dollar, and to €1.1770 against the euro pound. The Government borrowing costs likewise plunged, with 10-year plated yields tumbling to crisp record low of 0.639%. The benchmark FTSE 100 offer share index closed the the day at 6,740.16, which was a slight increase from the previous market.

However, if the impact of the stimulus package becomes as anticipated by the MPC, the pound may see itself rising also it will take a while to reach the height it had in early 2016.

How the stimulus package will affect the mortgages

The mortgages that will be affected are those with variable-rate asset. For example, the NatWest, Lloyds and the building society had to review their policy on their variable-rate products.

But for the majority of the mortgage borrowers, who are prescribed to fixed rate mortgage contracts, there will not be an immediately benefit from the interest rate cut. However, these borrowers may be affected when they decide to re-mortgage since the new offered rates will be lower than they would probably have.

Article written by Dwayne Buzzell