The Bank of England has enough room to cut interest rates by a total 250 basis points as well as to increase the size of its asset purchases, the outgoing Governor Mark Carney said Thursday.
The bank has sufficient headroom to at least double the August 2016 package of GBP 60 billion asset purchases, Carney said in a speech in London. This would be equivalent to a 100 basis point rate cut on the current interest rate.
Forward guidance at the effective lower bound adds to this armory, he added.
“All told, a reasonable judgement is that the combined conventional and unconventional policy space is in the neighborhood of the 250 basis points cut to Bank Rate seen in pre-crisis easing cycles,” Carney said.
The UK has relatively limited space to cut the interest rate, which remains at 0.75 percent. Policymakers Jonathan Haskel and Michael Saunders sought a 25 basis-point reduction for two straight policy meetings.
GDP growth is expected to pick up from the below potential level, underpinned by the reduction of Brexit-related uncertainties, Carney observed.
The governor noted that the economy has been sluggish, slack has been growing, and inflation is below target. “As is entirely appropriate, there is a debate at the MPC over the relative merits of near term stimulus to reinforce the expected recovery in UK growth and inflation,” he said.
If evidence builds that the weakness in activity could persist, risk management considerations would favor a relatively prompt response, said Carney.
The bank is set to publish its growth and inflation projections on January 30, along with its interest rate decision.
Andrew Bailey will take charge as the Bank of England Governor after Carney steps down on March 15.
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