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Bank of England Cuts Interest Rate for First Time Since 2009

The Bank of England cut interest rates for the first time since 2009 on Thursday and said it would buy 60 billion pounds of government debt to ease the blow from Britain's June 23 vote to leave the European Union.

The central bank said it expected the economy to stagnate for the rest of 2016 and suffer weak growth throughout next year, and lowered its main lending rate to a record-low 0.25 percent from 0.5 percent, in line with market expectations.

File photo of city workers walking past the Bank of England in the City of London
City workers walk past the Bank of England in the City of London, Britain, March 29, 2016. REUTERS/Toby Melville

But it also launched two new schemes, one to buy 10 billion pounds of high-grade corporate bonds and another - potentially worth up to 100 billion pounds - to ensure banks keep lending even after the cut in interest rates.

"Following the United Kingdom's vote to leave the European Union, the exchange rate has fallen and the outlook for growth in the short to medium term has weakened markedly," the central bank said in its quarterly Inflation Report.

Policymakers were not completely united on how to respond. The cut in Bank Rate and the measure intended to ensure banks passed it on to consumers - known as the Term Funding Scheme (TFS) - gained unanimous support.

But three policymakers - Kristin Forbes, Ian McCafferty, and Martin Weale - opposed raising the target for quantitative easing government bond purchases to 435 billion pounds from the 375 billion total reached in late 2012.

Forbes also opposed the purchases of corporate debt - something the BoE did briefly after the financial crisis, but more to aid market functioning than to boost growth.

Many economists had expected Forbes to oppose a rate cut after she said last month that the central bank should not panic and instead wait for more data on the scale of Britain's economic slowdown.

While many business surveys show Britain's economy has slowed sharply and may even be entering recession, it is too soon for official data on how the EU vote is affecting output.

The BoE left its forecast for growth this year steady at 2.0 percent, as the economy expanded faster in the first half of 2016 than it had expected in May. It also revised up its inflation forecasts sharply, due to the big fall in sterling since the financial crisis, predicting it will hit 2.4 percent in 2018 and 2019.