BUSINESS leaders have little confidence that stimulus measures introduced by the Bank of England will alone bring a significant improvement to the UK’s economic prospects, after the central bank slashed its growth forecasts for 2017 and 2018 in light of the downturn brought by the Brexit vote.
As widely anticipated, the Bank cut interest rates to 0.25 per cent from 0.5 per cent in a bid to boost households and businesses, as the economic clouds continue to darken following the UK’s vote to leave the European Union.
Flagging that rate cuts could yet be cut towards zero, the bank also expanded its quantitative easing programme and plans to purchase £10 billion of corporate bonds, while downgrading its projection for GDP growth from 2.3 per cent to 0.8 next year, and from 2.3 per cent to 1.8 per cent for 2018.
The measures come after a dramatic fall in the value of sterling and a series of surveys underlined the UK’s worsening prospects following the vote, with figures this week signalling the referendum result triggered the worse plunge in services output since the depths of the last recession.
But business leaders and economists fear the moves alone will not be enough to bring about significant economic improvement.
Liz Cameron, chief executive of Scottish Chambers of Commerce, responded by calling on the Scottish and UK governments to invest further in transport infrastructure such as airport expansion. Ms Cameron said: “The Bank of England’s actions were both expected and necessary but these measures alone will not be enough to stimulate the UK economy.”
Andy Willox, policy convenor for the Federation of Small Businesses in Scotland, said: “While these welcome moves from the Bank of England might be necessary to boost the economy, they may not be sufficient.
“Depending on the impact of today’s change, we may need to see additional measures to boost local and national economies from all levels of government.”
The Bank said six of the nine Monetary Policy Committee (MPC) members voted to increase its government bond purchasing programme to £435 billion from £375bn, while all but one voted in favour of the Bank buying £10bn of investment grade corporate bonds from mid-September.
The MPC also launched a £100bn Term Funding Scheme to provide funding for banks at interest rates close to the Bank Rate. This is an attempt to deal with concerns that, with interest rates so low, it will be difficult for banks and building societies to cut lending rates further.
Separately, the Bank’s Financial Policy Committee took steps to ease its broad measure of capital adequacy for banks ease the flow of lending to households and businesses.
Economists questioned how effective the stimulus measures will ultimately be, with Professor Graeme Roy, director of the Fraser of Allander Institute at the University of Strathclyde, citing uncertainty caused by the Brexit vote as the major issue which must be overcome. He said there will be “limits on how significant the impact could turn out to be with interest rates already so close to zero. Ultimately the key to improving the future outlook of the Scottish and UK economy will be a restoration of confidence and greater clarity around the terms of the UK’s exit from the EU.”
Economist Chris Williamson of Markit, which compiles surveys for the Chartered Institute of Procurement & Supply, argued that “there are huge question marks over the effectiveness of each measure”. He said: “The overriding concern is that the Bank can reduce the cost of credit and encourage more lending, but it can do little to boost the demand for lending and spur spending if business and households are worried about the outlook.”
The FTSE 100 closed up 105.76 points at 6740.16 as investors digested the measures, while the pound was trading at 1.31 US dollars at 5pm, compared with US$1.33 at the previous close.
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