The Bank of England (BoE) has cut UK interest rates from 0.5% to 0.25%, with signals that they could be lowered further if the British economy declines.
The BoE Monetary Policy Committee also announced that it would pump £60bn of electronic cash into the UK economy to buy government bonds – extending its quantitative easing (QE) programme to £435bn in total.
The committee also announced a £100bn loan programme for banks, to help them pass on the base rate cut to the real economy. Under this new “term funding scheme” (TFS) the BoE will create new money to provide loans to banks at interest rates close to the base rate of 0.25%.
This is the first interest rate cut that the central bank has imposed since 2009, at the height of the financial crisis.
Although there are suggestions that UK interest rates may be reduced further, Mark Carney, governor of the Bank of England, said that negative interest rates are not planned for the future. Carney said:
“The MPC is very clear that we see effective lower bound as a positive number, close to zero, but a positive number,” he said. “I’m not a fan of negative interest rates,” he added, noting that they had produced “negative consequences” elsewhere.
Reactions from the wealth management industry
Dean Turner, economist at UBS Wealth Management “Though not as sizeable as some expected, today’s cut represents the prudent stewardship we have come to expect of Mark Carney’s Bank of England. As anticipated, sterling’s post-Brexit slide has pushed up the inflation profile and the inflation target will now be breached. But it’s the much weaker outlook for growth, with the prominent possibility of a recession that will have spurred the Bank into taking action today.
“Where next for monetary policy is dependent on the political picture as well as how the economy unfolds. We expect a meaningful fiscal response in the Autumn, as signalled by the Chancellor, which could give the Bank greater flexibility.”
Andrew Wilson, Head of Investments at Towry: “Cutting from 50bps to 25bps will be unlikely to make much of a difference to anything, and of course you can’t force people to borrow. That said, there may be some psychological benefit in the sense that the Bank of England is alert to the current economic dangers, and is being proactive, as further evidenced by the additional “QE”.
“The expansion of QE was not a unanimous decision, even though the Monetary Policy Committee had also slashed forecasts for GDP in 2017. A new “funding for lending”-type scheme was also announced, so Mark Carney is certainly getting his shots way, and Chancellor Hammond is clearly supportive too.
“It does look as though the developed world is going to move away from so-called austerity, and we can anticipate loose fiscal as well as monetary policies, including, perhaps, long overdue infrastructure programs.“
Alex Brandreth, Deputy CIO at Brown Shipley: “It is unclear how further QE will stimulate the economy, interest rates have been at ultra-low levels since March 2009 and yet the UK economic recovery has been weak. Cutting interest rates is designed to make financing more affordable and encourage investors to borrow. The only problem is that we live in a highly indebted society and investors are unlikely to borrow should they have concerns about the future direction of the economy. Which begs the question; is monetary policy broken?”
Nigel Green, CEO and founder of deVere Group: “By pulling the trigger and cutting interest rates for the first time in seven and a half years today and boosting QE, the Bank of England has delivered yet another painful bloody nose to pensioners and savers.
“With interest rates now at their lowest since 1694, gilt yields will fall further. These yields are already incredibly low and by falling even more, pension deficits will increase further. This is extremely concerning because there is already a mammoth £935bn black hole in defined benefit pension schemes.”