Bank of England cuts UK interest rates to historic 0.25 per cent low

UK interest rates have today been cut from 0.5 per cent to 0.25 per cent - a record low and the first cut since March 2009 when they were slashed in a bid to cushion the UK economy from the global financial crisis.

Today’s Bank of England announcement did not come as a surprise and had been widely predicted.

The measure was announced along with a range of measures to stimulate the UK economy including buying £60bn of UK government bonds and £10bn of corporate bonds.

The Bank also announced the biggest cut to its growth forecasts since it started making them in 1983.

It has reduced its growth prediction for 2017 from the 2.3 per cent it was expecting in May to 0.8 per cent.

The decision to cut interest rates to 0.25 per cent was approved unanimously by the nine members of the Monetary Policy Committee (MPC) and is the first change in interest rates since March 2009.

Bank, and its governor, Mark Carney, had warned prior to the referendum vote on British membership of the EU that a vote to leave would result in a significant shock to the economy and that drastic measures would then be needed.

June’s ‘Brexit’ vote would, the Bank said, stoke inflation and push up unemployment as its monetary policy committee unveiled a four-point plan to mitigate the impact consisting of:

  • A cut in official interest rates to 0.25 per cent.
  • Plans to pump an additional £60bn in electronic cash into the economy to buy government bonds, extending the existing quantitative easing (QE) programme to £435bn in total
  • Another £10bn in electronic cash will be created to buy corporate bonds from firms “making a material contribution to the UK economy”
  • A new scheme to provide as much as £100bn of new funding to banks to help them pass on the base rate cut to the real economy. Under this new “term funding scheme” (TFS) the Bank will create new money to provide loans to banks at interest rates close to the base rate of 0.25%
  • The Bank’s intervention to shore up confidence with this new package was welcomed by the chancellor, Philip Hammond.

    He said in a statement: “The vote to leave the EU has created a period of uncertainty, which will be followed by a period of adjustment as the shape of our new relationship with the EU becomes clear and the economy responds to that.

    “It’s right that monetary policy is used to support the economy through this period of adjustment.”

    Paul Brewer, Government and Public Sector partner for PwC in Scotland, said: “The Bank of England has offered a gloomy outlook on growth, and with Scotland’s economic performance currently lagging the UK as a whole, the overall package - and interest rate cut, further quantitative easing and support measures to ensure the benefit of the rate cut feeds straight through to businesses and households - will be welcomed.

    “But while its never been cheaper to borrow to finance investment the challenge is for businesses to find the confidence to look beyond the economic negatives of the Brexit shock and “lower for longer”oil and invest for the longer term. Its hard to see that confidence building until we have more clarity about the UK’s - and Scotland’s - future relationship with the EU and the the wider consequences of Brexit. “

    Richard Cousins, pensions consulting partner at PwC, added: “Today’s base rate cut means long-term gilt yields are likely to take longer to reach their pre-crisis levels. PwC’s recent pensions risk survey showed interest rates are the biggest risk to schemes currently. Halfof schemes did not have material hedging in place to protect against sustained low long-term interest rates. The next few years are going to be demanding for scheme trustees and sponsors as they try and juggle how to measure and repair stubborn deficits in a persistent low interest rate world.”

    Andy Willox, the FSB’s Scottish policy convenor, said: “Our figures show that small business confidence is at a four year low. While these welcome moves from the Bank of England might be necessary to boost the economy, they may not be sufficient.

    “Official figures show negligible Scottish economic growth at the start of this year while official UK-wide growth forecasts have been revised downwards. Depending on the impact of today’s change, we may need to see additional measures to boost local and national economies from all levels of government.”

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