Currency Newsflash : Bank of England Cuts Interest Rates and Ramps Up QE ? Pound Sterling Forecast to Slump

Published: Thursday, 4 August 2016 13:00 BST - Written by John Cameron

STORY LINK Currency Newsflash : Bank of England Cuts Interest Rates and Ramps Up QE ? Pound Sterling Forecast to Slump

BoE Cuts Borrowing Costs, Pound Sterling (GBP) Exchange Rates Fall Today

In one of the most widely anticipated moves of recent years by a central bank, the Bank of England (BoE) announced a short time ago that it would be trimming its headline interest rate to a fresh record low of 0.25%. Base Rate had been at its previous record low of 0.50% for some seven years in the wake of the 2007 – 09 global financial crisis, but the BoE felt that easier money was warranted given June’s Brexit decision by the UK’s voters.

QE Scheme Applies More Pressure to British Pound, GBP Down Vs EUR, USD, AUD, NZD

However, analysts were caught on the back foot by the Old Lady of Threadneedle Street’s decision to ramp up its Quantitative Easing programme, which has remained dormant for several years. The BoE explained that it will be introducing a variant on its existing asset purchase programme in an effort to encourage UK retail banks to transmit the central bank rate cut to their customers. The minutes of the BoE policy meeting announced the introduction of,

‘a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion. The last three elements will be financed by the issuance of central bank reserves.’

The Bank was clear in its apportionment of blame for today’s significant loosening of UK monetary policy, noting that,

‘in the real economy, although the weaker medium-term outlook for activity largely reflects a downward revision to the economy’s supply capacity, near-term weakness in demand is likely to open up a margin of spare capacity, including an eventual rise in unemployment. Consistent with this, 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.’

GBP/EUR Exchange Rate Falls from Best Level of 1.20 to 1.17

The Pound Sterling (currency : GBP) lost significant ground against the other sixteen most actively traded global currencies thanks to the BoE’s announcement. The GBP EUR exchange rate dropped into the 1.1700s a short time ago, having traded at close to the 1.2000 GBP EUR threshold this morning. Analysts forecast that there could be further losses to come for the pair during coming months.

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