Since the global financial crisis, the Bank of England has been biding its time, laying the groundwork to hike interest rates once the British economy was sufficiently healed. That, after all, is how it worked across the Atlantic, when the US Fed raised rates in December after a long spell of maintaining near-zero rates.
But after seven years of sitting on their hands, British policymakers were stirred into action today (Aug. 4) to do something they weren’t expecting even a few months ago—the bank cut its benchmark rate to a new all-time low of 0.25%, from 0.5%, in an effort to contain the economic fallout after the UK voted to leave the European Union in a referendum in June.
“The decision to leave the European Union marks a regime change,” Bank of England governor Mark Carney said in a press conference. “The economic outlook has changed markedly, with the largest revision to our GDP forecast since the MPC [Monetary Policy Committee] was formed almost two decades ago.”
For that reason, for once, “Super Thursday” lived up to its name. This had become a facetious nickname for the days, like today, when the bank’s monetary policy decision announcement, meeting minutes, and quarterly forecast report were released simultaneously. Since March 2009, until today, the bank’s benchmark interest rate sat unchanged at 0.5%, the lowest in the institution’s 300-year history.
Over that time, policymakers had, for the most part, prepared the markets for an increase in the rate, a removal of the unprecedented stimulus enacted as the global economy teetered in 2008 and 2009. These are the sorts of signals bank officials were sending in the meantime:
- June 2009, speech by Bank of England governor Mervyn King
“It is too soon to reverse the extraordinary policy stimulus that has been injected into the UK economy… Nevertheless, it is not too early to prepare such “exit strategies” and to explain how they would work…When appropriate the MPC will raise Bank Rate…no bank should expect that the current extraordinary liquidity support will continue for ever.”
- November 2010, minutes of the MPC meeting
Andrew Sentance votes to increase the Bank Rate: “monetary policy should be used to reinforce the expectation that inflation would fall back to the target through a well-communicated policy of gradually increasing Bank Rate.”
- June 2011, minutes of the MPC meeting
Spencer Dale and Martin Weale vote to increase rates. Minutes record that “financial market participants expected Bank Rate to have increased by 25 basis points by the spring of 2012.”
- November 2012, minutes of the MPC meeting
“The Committee judged that it was unlikely to wish to reduce Bank Rate in the foreseeable future.”
- August 2013, speech by new Bank of England governor Mark Carney
“We do not intend to raise Bank Rate at least until the unemployment rate falls to 7%…Our forward guidance provides you with certainty that interest rates will not rise too soon.” (The rate fell below 7% in February 2014.)
- May 2014, minutes of the MPC meeting
“The case for moving gradually and cautiously was reinforced by uncertainty over the likely impact on the economy of a rise in Bank Rate. It could be argued that the more gradual the intended rise in Bank Rate, the earlier it might be necessary to start tightening policy.”
- September 2015, minutes of the MPC meeting
“When Bank Rate did begin to rise it was expected to do so more gradually than in previous cycles.”
- May 2016, minutes of the MPC meeting
“The MPC judged it more likely than not that Bank Rate would need to be higher at the end of that period than at present in order to return inflation to the target in a sustainable manner.”
- August 2016, news release
“All members of the Committee agreed that policy stimulus was warranted at this time, and that Bank Rate should be reduced to 0.25%.”
The bank also boosted its government bond-buying program by £60 billion ($80 billion)—bringing the total to £435 billion—and said it would buy £10 billion in corporate bonds for good measure. The central bank cut its GDP forecast for next year to 0.8%, from 2.3%, and lowered its 2018 prediction to 1.8%, from 2.3%.