Interest Rate Cut

The Bank of England has today (4^th August) announced a cut to the base rate.  The cut of 0.25% is the first since 2009 and sees it fall to a new low of 0.25%.  The cut was approved unanimously by all nine members of the Monetary Policy Committee.  Furthermore the majority of the Committee said they would support a further cut later this year, taking it close to zero, if the economy performed as they expected it to over the coming months.

The rate cut is part of a package of measures, including the purchase of up to £60 billion of UK Government bonds (quantitative easing) and up to £10 billion of corporate bonds, all ‘designed to provide additional support to growth’. Furthermore, the Bank has also announced a new £100 billion scheme to encourage banks to lend to households and businesses. Overall, the total support from the Bank to the economy has increased by a further £170 billion.

The news is obviously good for those wishing to borrow, but not so for savers.  Sterling has also already weakened against the Euro and the dollar following the announcement.  In addition, showing its lack of confidence in the future,  the Bank of England has also cut is growth prediction for 2017 from the 2.3% it was expecting in May to just 0.8%; the biggest cut in growth forecast since 1993 when it first started making them.  It also expects unemployment to rise (marginally), inflation to rise, growth in real incomes to slow and house prices to fall.

It is also noteworthy that the Bank of England estimates that the economy will be 2.5% smaller in three years’ time than it believed it would be when it last opined on these matters in May.

Overall, today’s announcements in conjunction with the measures announced by the Bank of England following June’s referendum demonstrates its willingness to intervene to support the UK economy. However, the Bank’s remit is monetary policy only. Changes to fiscal policy are also likely to be required to ease any Brexit-related uncertainty which is weighing on business confidence as indicated by the closely watched purchasing managers’ index (PMI) recently. Such changes may not be announced until the Autumn Statement later this year. By this time, the Bank of England will hope that themeasures announced today will have helped to stabilise the economy but further rate reductions are expected.