The Monetary Policy Committee has thrown the kitchen sink at the stuttering UK economy. But the governor knows he’s not Superman.
The cut in the bank rate, the first in 7 seven years and at the lowest rate in history, demonstrates that the Bank of England is not particularly confident about UK economic prospects. With falling confidence indicators, such as the Purchasing Managers’ Index (PMI), as a result of the uncertainty caused by Brexit, the Bank has acted quickly to loosen monetary policy to encourage spending by both households and firms. Lower rates reduce the incentive to save and encourage borrowing as the reward for the former falls and the cost of the latter decreases. However, will a 0.25% cut make a real difference? Rates were already at a historic low – will we see negative rates, used by Japan, ECB, Sweden, for this first time in B of E history? Either way, growth forecasts have been slashed, as predicted by most economists prior to the Brexit vote. In the short-term, at least Brexit appears to be making the country worse off than it would have been otherwise. Long-term, well time will tell.