Bank of England cuts rates to offset Brexit hit

The Bank of England on Thursday cut its key interest rate for the first time since the 2009 financial crisis and said it will buy both government and corporate bonds in a fresh round of stimulus measures designed to offset the economic fallout from Britain’s vote to exit the European Union.

The economic downside for the United Kingdom since the June 23 Brexit vote has become more visible, prompting the BoE to roll out a package of stimulus measures it hopes will cushion the blow from Brexit and support the U.K. economy, which the BoE said has slowed "markedly."

The BoE decision included its first interest rate cut in more than seven years and pushed its key borrowing rate down to 0.25%, from 0.50% — marking its lowest yield on record.

The stimulus package, according to a BoE press statement, includes restarting its U.K. government bond-buying program. It plans on buying 60 billion pounds worth of government bonds, boosting the total amount of purchases to 435 billion pounds. The BoE said it would start buying U.K. corporate bonds for the first time, with 10 billion pounds worth of corporate paper purchases planned. The BoE said it will finance the purchases with the issuance of central bank reserves.

The BoE said it was likely rates could be cut further and close to zero in subsequent meetings. It also downgraded the U.K.'s economic outlook for 2017. The central bank slashed its 2017 GDP growth to 0.8% from 2.3%. It left its 2016 growth outlook unchanged.

"A majority of members expect to support a further cut in the Bank Rate to its effective lower bound at one of (its) forthcoming meetings during the course of the year," the BoE said in a statement. The central bank also said rates could be cut close to zero.

The stimulus package was more robust than market participants had expected. While the rate cut was widely expected, investors were unsure if the BoE would roll out fresh asset purchases.

The financial market reaction was bullish for stocks. The benchmark FTSE 100 stock index in London was 1.5% higher after being down 0.2% before the announcement. The broader Stoxx Europe 600 index was up 0.5%, building on smaller gains before the BoE stimulus measures were announced.

Government bond yields in the U.K., known as guilts, fell back near records, dipping briefly to a record low of 0.639% before rebounding to .0679%. The British pound fell 1.4% on the news.

On Wall Street, the Dow Jones industrial average, which snapped a seven-session losing streak Wednesday, closed Thursday essentially unchanged at 18,352.

At its July meeting, the BoE had opted to keep interest rates steady at a seven-year low of 0.5%, saying it wanted more official data to determine how big an economic hit Brexit has caused. The BoE felt the need to move aggressively at Thursday's meeting after a slew of gloomy economic readings in recent weeks due to the Brexit fallout. The BoE actions were also "pre-emptive" in nature, analysts say.

Wednesday, the July reading of the U.K.’s purchasing managers index found output and new business declining at its fastest rate since early 2009, according to financial data firm Markit. The weak data point followed similar post-Brexit weakness related to manufacturing, as well as business and consumer confidence.

"Recent surveys of business activity, confidence and optimism suggest that the United Kingdom is likely to see little growth in GDP in the second half of this year," the BoE said in a statement. "Given the extent of the likely weakness in demand relative to supply, the (BoE)  judges it appropriate to provide additional stimulus to the economy."

Investors continue to wonder whether central bank intervention will be successful in boosting growth.

Alastair George, chief strategist at Edison Investment Research, said, “Though the market response has been positive, the cut in rates to close to zero shows how the bank is largely out of ammunition in terms of interest rate policy. However, we fear that without a more expansive fiscal policy, buying government bonds is likely to do little to support the real economy over the coming quarters, with private sector sentiment so weak."

Heading into Thursday's policy meeting, economists have been warning of a coming recession in the U.K.

The recent weak data “increased the chances of the U.K. sliding into at least a mild recession,” Chris Williamson, chief economist at Markit, said in a press release.

The BoE said its moves Thursday should offset some of the economic harm caused by Brexit. The BoE said it expects little growth in the second half of the year.

"Had it not taken the action announced today, the (BoE) judges it likely that output would be lower, unemployment higher and slack greater throughout the forecast period, jeopardising a sustainable return of inflation to the target," the BoE said in a statement.

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The outlook for the U.K. economy 12 months out also was poor, falling to its lowest level since February 2009, according to Markit.

“The extent of any (economic) downturn clearly depends to some degree on the policy response,” Williamson wrote.