Bank of England Governor Mark Carney called on banks to pass on on today's interest rate cut to customers.
The central bank today cut the benchmark interest rate by 25 basis points to 0.25%. This is the first time it has cut rates since March 2009. The bank also increased its quantitative easing program. The changes in monetary policy were taken in response to the U.K.'s vote to leave the European Union in June.
In response to the Brexit vote, the central bank also slashed its growth outlook for 2017 to 0.8% from 2.3% and to 1.8% in 2018 from 2.3%. Growth is expected to remain at 2% this year. It has also upped its inflation targets to 0.8% from 0.4% for this year, 1.9% for 2017 from 1.5%, and 2.4% from 2.1% in 2018.
During a press conference Carney said, "The economic outlook has changed markedly.... and are consistent with the risks which the MPC saw before the vote."
All members of the central bank's Monetary Policy Committee agreed to cut the rate and a majority said that they expect to make further cuts in upcoming meetings, to "close to, but a little above, zero."
Carney said he was "not a fan of negative interest rates" as he has seen the consequences in other jurisdictions.
"We have other options to provide stimulus, if further stimulus is needed," he said.
The central bank announced the launch of the Term Funding Scheme (TFS) which will provide funding for banks at an interest rate close to the bank rate. "This monetary policy action should help reinforce the transmission of the reduction in the Bank Rate to the real economy to ensure that households and firms benefit and firms benefit from the MPC's actions," the MPC said.
Carney said during a press conference about the decision that banks can borrow up to £100 billion ($133.4 billion) in the next year through TFS.
Through this facility, "banks have no excuse not to pass on the rate cut to consumers. Banks should be writing to customers," he said.
He said that he was specifically talking about the pricing of new loans to customers.
Carney added, "There are penalty rates if banks don't lend."
The MPC also announced a £10 billion corporate bond buying program.
The committee said, "Given that corporate bonds are higher-yielding instruments than government bonds, investors selling corporate debt to the Bank could be more likely to invest the money received in other corporate assets than those selling gilts. In addition, by increasing demand in secondary markets, purchases by the Bank could reduce liquidity premia; and such purchases could stimulate issuance in sterling corporate bond markets."
The bank also expanded the asset purchase program for U.K. government bonds by £60 million to a total of £435 billion.
The pound recovered slightly before the decision was announced. But it fell on the news, and was recently down 1.41% at $1.3137.
The FTSE 100 surged after the announcement and was recently 1.43% up at 6,729.36.
Royal Bank of Scotland (RBS) had a variable day and was recently 1.4% up. RBS's NatWest arm, which has 17% of its customers on standard variable mortgages, it was currently reviewing whether it would make changes to the rate of its variable rate products.
Lloyds Banking Group (LYG) shares were recently 0.11% down.
It said: "The Bank of England base rate is only one of a number of factors that we take into account when reviewing interest rates. The 0.25% reduction will form part of the ongoing rate reviews across our product ranges. All variable rate products that track the Bank of England base rate will be reduced by 0.25% from September."
Carney said the committee agreed the "exceptional package" and "largely determined by the impact of the decision to leave the EU." The decision has seen weakness in the commercial and residential property, and indicators "have fallen to levels seen in the financial crisis and sometimes to all times low."