UK interest rates cut to record low of 0.25pc

The Bank of England (BoE) has cut interest rates from 0.5% to a record low of 0.25% and has expanded QE.

The vote to cut interest rates by members of the Monetary Policy Committee (MPC) was unanimous, and the BoE has signaled that interest rates may be cut further should the outlook for the UK economy worsen.

The cut in rates, the first in seven years, was accompanied by a package of measures to stimulate the economy, which includes: a £100bn ‘Term Funding Scheme’ (TFS) for banks, which is designed to encourage banks to pass on the rate cut to households and businesses, and plans to buy £10bn of corporate bonds and £60bn of UK government bonds, extending the current quantitative easing programme (QE) to £435bn in total.

The Bank said:

“The cut in Bank rate will lower borrowing costs for households and businesses. However, as interest rates are close to zero, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn might limit their ability to cut their lending rates.

“In order to mitigate this, the MPC is launching a ‘Term Funding Scheme’ that will provide funding for banks at interest rates close to Bank rate.

“This monetary policy action should help reinforce the transmission of the reduction in Bank rate to the real economy to ensure that households and firms benefit from the MPC’s actions.

“In addition, the TFS provides participants with a cost effective source of funding to support additional lending to the real economy, providing insurance against the risk that conditions tighten in bank funding markets.”

The Bank has also slashed its growth forecasts for the UK by an unprecedented amount. Its growth prediction for 2017 has been cut from 2.3%, as predicted in May, to 0.8% - the greatest cut to its growth forecasts since it started making them in 1993.

David Whittaker, Managing Director of Mortgages for Business, commented:

“A lower base rate – and even more QE – doesn’t necessarily mean mortgage rates will be reduced. Mortgage pricing is largely dictated by the cost of borrowing on the inter-bank swap markets, while the current uncertainty around liquidity will mean that some lenders will not want to reduce their rates.Those on tracker mortgages will see a fall in their monthly payments – though many borrowers, particularly buy to let landlords, have already opted for the reliability of similarly-priced fixed rate deals.

“The big unknown is the new Term Funding Scheme, and the more significant question of how this might reform the financial plumbing of the UK in a more radical or unexpected way.

“Aside from the changes announced today, the reasons for such a bazooka approach by the Bank are important too. It seems clear that the general economic outlook has worsened considerably in the wake of the EU referendum. And this raises questions for investors. Returns on savings will weaken, as will bonds and equities – and lower yields will only be exacerbated by new monetary stimulus. Meanwhile, the property market’s fundamentals remain strong – given the imbalance between supply and demand for homes in the UK and accelerating demand for rental accommodation. This will continue to make buy to let a solid investment for those property investors with the right finance and a carefully thought-through business plan.”


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