Right now, Brexit is just a theoretical concept. The British public voted to leave the European Union, but negotiations on the terms of the divorce haven’t even started yet. That hasn’t stopped the referendum result from hitting the UK economy like a sledgehammer.
Bank of England governor Mark Carney said today (Aug. 4) that the vote “marks a regime change,” leading to the “largest revision to our GDP forecast since the [Monetary Policy Committee] was formed almost two decades ago.” The UK is “likely to see little growth” for the rest of this year, and sharply lower growth in 2017 and 2018 than forecast just a few months ago:
To stop the expected downturn becoming something nastier, the Bank of England unveiled a raft of stimulus measures, including a cut to interest rates and a revival of its bond-buying program, which now includes corporate debt alongside government securities.
Investors seem surprised by the aggressiveness of the moves, with the pound dropping by more than 1% against the dollar and the blue-chip FTSE 100 stock index jumping by more than 1% on the news. Government bond yields tumbled to new record lows.
And as is so often the case, market watchers almost immediately began wondering if more stimulus would be needed. “For all the ammunition which the BoE has expended, we continue to question how much relief it can provide to counter what is an uncertainty, not a monetary, shock,’’ said Peter Dixon, an analyst at Commerzbank.
After leaving interest rates unchanged for seven years, all the while hinting to the markets that the next move would be a hike, Carney suggested that if the bank’s gloomy forecasts proved true another rate cut could be on the cards.