The Bank of England today reduced interest rates by 25 basis points to 0.25%, a record low. As well as the rate cut, it is to boost its quantitative easing programme in an attempt to stimulate the economy. The bank will extend its asset purchase scheme of UK government bonds by £60bn, bringing the total to £435bn, and will spend up to £10bn buying UK corporate bonds.
The bank also cut its growth forecast for the economy; it now expects growth of just 0.8% next year, down from the 2.3% it forecast in May
The rate has been at 0.5% since 2009, when it was reduced as an emergency measure in response to the financial crisis.
Since the EU referendum result, the economy has been faltering, with fears of recession growing. Yesterday’s Purchasing Managers’ Index (PMI) for the services sector – widely seen as a barometer of the health of the economy – pointed towards “mild recession”, as output fell sharply. This came after manufacturing and construction PMIs both showed contractions. Carney is hoping a rate cut will give the economy a fillip.
Market reaction was instant, with the FTSE 100 and the FTSE 250 both up sharply
The move means more woe for savers; already, many “best buy” accounts have disappeared from the markets. Anyone looking to get a decent rate on cash is going to be sorely disappointed. Borrowers, however, should be able to secure better deals.
Of course, the big question is: how low can the bank go? With more and more central banks breaking through the zero-percent barrier, the question may not be could we see negative interest rates here, but when will we see them, and what will that mean?