Thursday 4 August 2016

How pessimistic is the Bank of England?

The governor of the Bank of England, Mark Carney, issues the largest stimulus package since the financial crisis that the rates are cut to 0.25%. Carney said that the reason of delivering this stimulus package is the likelihood of the British economy falling into a recession increases due to the rising uncertainty caused by Brexit. 0.25% is a fairly low rate that almost zero, but not zero nor negative. However, in terms of the real rate, when the inflation is above 0.25%, then the real base rate is negative. Currently the UK inflation rate is 0.5% so the real base rate is negative. The Bank of England believes that the unemployment rate rises, the housing price falls and the inflation rate rises when a recession hit the economy. The interest rate stayed unchanged since the financial crisis and a further cut of the base rates to negative real rates shows that the Bank of England believes Brexit will hit the British economy worse than the last financial crisis.

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