UK base rate cut to new low of 0.25%

iStock_000016271702XSmallUK interest rates have been cut to a new all-time low. Bank of England (BoE) policymakers reduced the base rate by 0.25 percentage points to 0.25% at their August meeting. Prior to their decision, the central bank’s key interest rate had remained at 0.5% since March 2009 – their lowest level since the BoE was established in 1694.

The rate cut – which was unanimously agreed by the nine members of the Monetary Policy Committee (MPC) – had been widely anticipated for some time; investors had been surprised by the MPC’s decision to maintain its monetary policy stance at its July meeting. Alongside August’s cut, policymakers signaled their readiness to take further action if required, perhaps even reducing base rate to near-zero levels if necessary. Meanwhile, in a series of letters between BoE Governor Mark Carney and the new Chancellor of the Exchequer Philip Hammond, the Chancellor stated that he would take “any necessary steps to support the economy and promote confidence”, fueling speculation about the possible content of his Autumn Statement.

The BoE expanded its stimulus measures and will purchase £60 billion-worth of government bonds up to £10 billion-worth of corporate bonds. In addition, the bank will also lend up to £100 billion to the UK’s banks in a new Term Funding Scheme designed to make sure the measures feed through to the real economy. There was some dissent amongst policymakers about the need for additional quantitative easing; three members of the MPC felt that the decision should wait until more information was available.

The BoE warned that “recent surveys of business activity, confidence and optimism (suggested) that the UK is likely to see little growth in GDP in the second half of the year”, but maintained its forecast for 2% economic growth in 2016. Looking further ahead, however, the central bank slashed its growth forecast from 2.3% to 0.8% in 2017, and from 2.3% to 1.8% in 2018.

The Confederation of British Industry (CBI) hailed the BoE’s decision as a “shot in the arm for business and consumer confidence”. Nevertheless, the CBI also urged the UK Government to develop a “clear plan and timetable for EU negotiations”. Meanwhile, the British Chambers of Commerce (BCC) welcomed the stimulus measures, but gave a lukewarm response to lower rates, warning that they would have “little long-term effect on businesses when rates are already so low”.

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