As expected, the Bank of England has cut the base rate of interest from 0.5% to 0.25%.
As the chart below shows, this is the cut is the first change in seven years and takes interest rates to a new, all time, low.
Whilst announcing the reduction, governor, Mark Carney, said: “We took these steps because the economic outlook has changed markedly, with the largest revision to our GDP forecast since the MPC was formed almost two decades ago.”
He added: “By acting early and comprehensively, the MPC can reduce uncertainty, bolster confidence, blunt the slowdown, and support the necessary adjustments in the UK economy.”
The decision was backed by all members on the Bank’s Monetary Policy Committee (MPC), and Mr Carney made it clear that banks and other lenders would be expected to pass on the cut to borrowers: “The MPC is determined that the stimulus the economy needs does not get diluted as it passes through the financial system.”
The governor also announced the introduction of the ‘Term Lending Scheme’. Seemingly similar to the Funding for Lending scheme, this will make £100 billion of funding available to lenders at close to the new base rate of 0.25% with the aim of stimulating lending and therefore the wider economy.
The previous Funding for Lending Scheme had a negative effect on savings interest rates as banks and building societies were provided with an alternative, low cost, source of capital. Only time will tell whether the new scheme has the same results.
