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More stimulus for UK economy

Bank cuts interest rate to historic low of 0.25%

Bank of England12.01pm: The Bank of England today cut the interest rate by 0.25% to 0.25% in response to the slowdown in the economy.

There is also an increase in quantitative easing.

The decision, announced at noon, was the first for seven years and was broadly anticipated.

It follows a series of recent surveys pointing to a fall in activity and confidence across a number of sectors since the EU referendum on 23 June.

An industry survey yesterday suggested the economy was shrinking at the fastest pace since the BoE last lowered rates in March 2009 following the banking crisis.

New figures on car registrations confirm evidence of a slowdown in consumer spending with private registrations dropping 6.1% year-on-year in July.

There had been expectations of a cut at last month’s meeting of the nine-member monetary policy committee but it voted 8-1 to keep the interest rate on hold to await further data on the economy. The latest decision was approved unanimously.

The 0.25% in base rate will mean a £22 a month reduction in mortgage payments on a 25-year mortgage for a typically-priced £211,000 home.

Mark Carney August

Mark Carney (above), governor of the Bank, said it expected the UK economy to stagnate this year and suffer weak growth next year. He suggested there could be a further cut to 0.1%, saying Bank was “ready to take whatever action” was required.

The new rate is lowest level in the bank’s 322-year history and the cut follows similar stiumulus measures introduced by the Bank of Japan and the Reserve Bank of Australia.

The Bank of England has also announced the injection of an additional £60bn in gilts, as well as up to £10bn in corporate bonds over the next 18 months. It will also introduce a new Funding for Lending scheme, worth up to £100bn, in order to encourage more bank lending.

The FTSE 100 rose 95 points or 1.44% within half an hour of the announcement, but sterling fell to $1.32.

CBI chief economist, Rain Newton-Smith, said: “The combination of a rate cut and more quantitative easing should be a shot-in-the-arm for business and consumer confidence, lowering borrowing costs and keeping liquidity flowing through the economy.

“The Bank’s action will help restore confidence in the UK economy and what’s now most important to businesses is that the Government develops a clear plan and timetable for EU negotiations. 

“At the same time, it must press ahead with domestic policy priorities, especially infrastructure decisions, which will allow firms to get on with serving their customers and investing for the future.”

Russ Mould, investment director at AJ Bell, said: “Markets have been pricing in a loosening of monetary policy ever since the Brexit vote so today’s move by the Bank of England is likely to be welcomed by equity investors but is bad news for people with cash savings. 

“The outcome may be that we see no pick-up in economic growth”

“There is a big question mark over whether the rate cut will truly make any difference to the economy. Headline borrowing costs have stood at record lows for more than seven years, yet economic growth has remained sluggish.  It is debatable whether lenders will reduce their variable rate mortgages but highly likely that savings rates will be slashed further.

There is already a desperate hunt for income and a further reduction in bank savings rates will do nothing to help this.  So the outcome may be that we see no pick-up in economic growth with people looking for an alternative home for their savings rather than spending more. 

History shows that interest rate cuts can boost stock prices with markets having jumped over 8% in the six months following previous cuts in interest rates since 1970.

“Overall, stock markets may welcome today’s move in the short-term, with sterling a possible sacrificial lamb but as always there will be winners and losers.”

Calum Bennie, savings expert at Scottish Friendly, said: “Having spent the best part of seven years debating when interest rates may rise from their record lows, the agenda has swiftly changed as a move to 0.25% in the base rate edges us closer to negative interest rates.”

Peter Harrison, Director of Money, at MoneySuperMarket, said:Today’s decision will be met with mixed emotions, depending on whether you’re a borrower or a saver.

“The biggest positive change is likely to be felt by the millions of first time buyers in the UK, especially those on tracker mortgages, who’ve bought their house in the past seven years and therefore never experienced a rate change*. Their monthly payments are only going one way – down. It should also provide much needed confidence for those people considering getting on the property ladder, with some of the best fixed rate mortgage deals available from the likes of Coventry Building Society and HSBC. Borrowers have never had it so good. 

“However, it’s a different situation for savers. Rates have been painfully low for many years and the base rate move could see them drop even lower. But there are still opportunities to save and customers shouldn’t settle for a miserly rate if there’s a better one to be found elsewhere, whether that’s via ISAs, bonds or peer-to-peer lending. Some of these options offer higher returns but also come with bigger risks, so customers should examine all investment opportunities properly before taking the plunge.

“In addition, the rise of challenger and overseas banks has fueled better saving rates than those of traditional banks, while current accounts also offer a viable savings proposition, so all is not lost and people just need to shop around to find the best value for them.

“Chickens have come home to roost”

 

“It seems for many savers chickens have come home to roost. Any false sense of security around the outlook for savers post-Brexit has now been removed. It’s particularly ironic that this move is most likely to affect the cash savings of the over 60s, the demographic that were among the most in favour of leaving the EU.

“This decision has the chance of promising much, but delivering very little. As much as five out of every six mortgage borrowers in UK would see no immediate benefit from cut, cash savings rates will become even worse and pensioners will suffer from even lower annuity rates. We are in an era where people have to be making sure their money is working as hard as it can.

“Saving more for retirement will become a national priority as a result of this move. Stocks and shares ISAs offer savers a chance to access the growth they used to expect from their current account. Although people need to consider the risk involved, there are various degrees of risk people can take.”

Mark Hayward, managing director, National Association of Estate Agents, said: “Today’s interest rate cut announcement will be welcome news for many current homeowners.  However, it represents a body blow for savers and those hoping to get their first foot on the property ladder.

“Homeowners with outstanding mortgages are currently enjoying some of the lowest fixed rate mortgages seen for a long while, with lenders battling it out to offer the cheapest deal.  Cutting interest rates further is likely to improve confidence among those prospective house-buyers who may have put their search on hold, following the Brexit vote in June.

But for those saving to pay a deposit on a future home, the interest rate cut will be frustrating.  The last government focused heavily on supporting first time buyers (FTBs), with the introduction of schemes such as Help to Buy. Many of those looking for help now will have to wait for initiatives such as the Lifetime ISA to launch, which will then only help those under 40 to save for a home.

“The outcome of the today’s rate cut is simple – we will see aspiring homeowners saving harder for longer, which will no doubt have an impact on the number of first time buyers succeeding in their dream of acquiring their own home.”

 

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