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Bank of England Lowers Interest Rates Following Brexit

LONDON, August 4, 2016 - The Bank of England announced on Thursday the decision to cut interest rates to near nothing, unleashing billions of pounds into the economy, citing the weaker economic outlook after the shock Brexit vote.

The central bank said it projected the economy to stagnate for the remainder of 2016 and suffer weak growth throughout next year, lowering its interest rates for the first time since 2009.

In what one bank dubbed a "sledgehammer stimulus," the Bank of England cut interest rates 25 basis points to 0.25 percent and said it would buy $79 billion of government bonds with newly created money over the next six months.

"By acting early and comprehensively, the [Bank] can reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments in the U.K. economy," Bank of England Governor Mark Carney told a news conference.

Sterling fell 1.2 percent against the dollar following the announcement, while British government bond yields hit record lows and the main share index rose by nearly 2 percent.

 

Carney said he had unveiled an "exceptional package of measures" because the economic outlook had changed markedly following the Brexit vote.

Finance Minister Philip Hammond welcomed the rate cut and said he and Carney had "the tools we need to support the economy as we begin this new chapter and address the challenges ahead."

While many business surveys show Britain's economy has slowed sharply and may even be entering recession, it is too soon for official data on how the EU vote is affecting output.

The Bank of England left its forecast for growth this year steady at 2.0 percent, as the economy expanded faster in the first half of 2016 than it had expected in May.

But 2017 brings a sharp downgrade to growth of just 0.8 percent from a previous estimate of 2.3 percent - the biggest downgrade in growth from one Inflation Report to the next, exceeding what was seen in the financial crisis. The growth outlook for 2018 was cut to 1.8 percent.