The cut to 0.25 per cent – the lowest ever – will shave around £26 a month off mortgage payments for those who borrowed £200,000 over 25 years, but it will mean even lower returns on precious nest-eggs, with almost 120 savings accounts already set to see their rates cut between now and the end of the year.
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Chancellor Philip Hammond said he backed the decision by the Bank of England.
“By acting early and comprehensively, the MPC can reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments in the United Kingdom economy”, he told a news conference.
The FTSE 100 jumped 1% to 6,700 on the news while the pound dropped 1.2% against the dollar to $1.317.
“Importantly, the Bank sees nearly no growth in the second half of 2016, though does not see a recession as its central forecast, averted in part thanks to the aggressive action announced today”.
While many analysts forecast a 0.25 percentage point rate cut, Behravesh suggested that this might not be enough to revive a stalling economy.
The Term Funding Scheme is created to make sure that the lower levels of interest rates now set by the BoE are reflected in the costs commercial banks charge households and companies to borrow funds.
The central bank continues to project the economy to expand 2 percent in 2016, but it forecasts just a 0.8 percent of growth in 2017.
The extensive package of measures comes despite the central bank predicting that inflation would rise above its 2% target as a result of the falling value of the pound.
However, economists including former top BoE officials have doubts about how much good either rate cuts or more quantitative easing will do for the economy, with both official interest rates and government borrowing costs already at or near record lows.
“A majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the (committee’s) forthcoming meetings during the course of the year”, policymakers said in a statement.
The inflation report will also accompany the announcement today, which I do think makes the prospect of monetary easing more likely.
The Bank of England’s quarterly inflation report does not foresee a recession, although all of its forecasts take into account the stimulus measures. The Bank’s efforts to steer Britain through the post-Brexit economic shock have taken it into uncharted territory.
Yet today Mark Carney said weaker pound’s boost Britain’s exporting businesses – which have always been struggling – were among the positive economic side effects of the referendum result. The vote to cut rates and introduce the Term Funding Scheme was unanimous.
In order to mitigate this, the MPC is launching a Term Funding Scheme (TFS) that will provide funding for banks at interest rates close to Bank’s rate of 0.25%.
“Message one: it is up to the government to implement a ‘comprehensive productivity plan.’ Furthermore, the Bank has severely downgraded its expectations for business investment over the next couple of years”, she said.
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Carney said there was scope for policy makers to take more action.
