Rand at October 2015 levels as UK battles Brexit with rate cut

London - The Bank of England cut its key rate for the first time in more than seven years and will restart the printing presses as it ramps up defences against a Brexit-induced slump.

Analysts said the announcement, dubbed Super Thursday, could impact the rand positively.

13:30 UPDATE: The rand was 1.92% stronger at R13.71/$ at 13:30. The last time this rate was seen was on 27 October, 2015. The appreciation of the rand was also linked to the early results in South Africa's local government elections on Thursday, which saw the opposition DA party leading in key metros.

READ: Rand at 9-month high as DA leads metros in early results

13:50 UPDATE: The pound fell the most in four weeks after the Bank of England cut interest rates. (Click on the link for more reaction).

Officials, led by Governor Mark Carney, slashed their growth forecasts by the most ever and voted unanimously to reduce the benchmark by 25 basis points to a record-low 0.25%.

While saying they had scope to do more if needed, including taking the key rate close to zero, they also announced a plan to lend as much as £100bn to banks to ensure the measures reach the real economy.

In addition, the Monetary Policy Committee will buy £60bn of government bonds over six months and as much as £10bn of corporate bonds in the next 18 months, though there was disagreement among the nine members about whether quantitative easing was warranted at this stage. In total, the balance sheet could expand by £170bn.

“The package contains a number of mutually reinforcing elements, all of which have scope for further action,” officials said in a statement. Should their forecast prove correct, “a majority of members expect to support a further cut in bank rate to its effective lower bound” later this year.

The rate reduction marks the first change in the benchmark since March 2009, at the height of the financial crisis. Officials said they now judge the lower bound to be “close to, but a little above, zero.”

Forecasts cut

The easing arrives amid mounting signs quitting the European Union is having an adverse impact on the UK economy. While the full fallout hasn’t yet shown up in official data, initial reports show confidence has slumped and industry surveys have weakened.

The central bank cut its growth forecast for next year to 0.8% from 2.3% and lowered its 2018 prediction to 1.8% from 2.3%. Weaker investment and consumption were the main drivers, with the BOE seeing business investment falling this year and next, and housing investment dropping 4.75% in 2017.

“Recent surveys of business activity, confidence and optimism suggest that the U.K. is likely to see little growth in GDP in the second half of this year,” the BOE said.

This year’s growth forecast was left unchanged at 2%. For the current quarter, the BOE predicts an expansion of just 0.1%.

WATCH: Reaction to rates cut

Inflation outlook

While the referendum result has darkened the growth outlook, it’s also lowered the pound, pushing up costs for importers and potentially stoking inflationary pressures.

That prompted the central bank to revise up its inflation forecasts, with the projections showing the rate will reach its 2% target in the final quarter of next year. In the last set of predictions in May, the MPC saw price growth staying below the goal until the second quarter of 2018.

The BOE plans to look through the currency-driven inflation spike and will take longer than usual to get price growth to target. It said action to counter the pound’s impact would only hurt growth and push up unemployment.

In an exchange of letters with Chancellor of the Exchequer Philip Hammond, Carney said the MPC remained committed to taking whatever action is needed to support growth. Hammond replied that he was also willing to take “any necessary steps to support the economy” and that he would outline his fiscal plans in his Autumn Statement later this year.

Dissent

The BOE said while it hadn’t made any assumptions about the outcome of the government’s Brexit negotiations or any new trade deals, its forecasts were conditioned on a gradual worsening of the economy’s openness. The forecasts were also based on market expectations for interest rates to fall to as low as 0.1 percent between the fourth quarter this year and the third quarter of 2018.

External officials Kristin Forbes, Ian McCafferty and Martin Weale opposed the plan to increase the asset-purchase target, saying the initial surveys may overstate economic weakness, and that buying more bonds risked pushing inflation even further above the bank’s goal. Forbes was alone in opposing the plan to buy corporate assets.

“These members felt that any decision to purchase government bonds could be made at future meetings, once more information becomes available,” the minutes showed. Forbes was “particularly concerned about excessive stimulus at this stage, the costs of easing monetary policy and the risks involved in the program,” it said.

The plan to buy gilts and corporate bonds will be financed by the issuance of central bank reserves. The BOE plans to purchase sterling, non-financial investment grade corporate bonds “issued by firms making a material contribution to the U.K. economy,” it said.

Thursday’s package builds on the BOE’s strategy for combating the post-Brexit fallout. Financial stability officials have already lowered the countercyclical capital buffer, freeing up as much as 150 billion pounds in additional lending to households and businesses, and the central bank is holding weekly liquidity operations to ease any potential strains.