Bank of England cuts interest rates to 0.25% to avert Brexit recession
- Credit: PA
The Bank of England has slashed interest rates for the first time in more than seven years and delivered an emergency package worth up to £170bn to ward off recession following the Brexit vote.
Policymakers voted unanimously to cut rates to a new historic low of 0.25% from 0.5% - the first cut since March 2009, when the Bank reduced rates at the height of the financial crisis.
It also unveiled a package of measures to boost a sharply slowing economy after the EU referendum vote, with the Bank revealing its biggest growth downgrade since quarterly inflation report records began.
The Bank believes the measures will see the UK avoid dropping into recession, but it warned of a “material slowdown”, higher unemployment and falling house prices over the next year.
Its economy-boosting action will see it fire up the printing presses once more to expand its £375bn quantitative easing programme by £60bn to £435bn - the first QE increase since 2012.
It is also buying £10bn of corporate debt and announced a new scheme worth up to £100bn to encourage banks to lend to households and businesses.
More rate reductions are also on the cards, with the minutes of the Monetary Policy Committee (MPC) meeting revealing that most members expect to cut rates to a “little above zero” by the end of the year if growth slows as expected.
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The quarter-point rate cut is good news for home-owners, but spells further misery for long-suffering savers.
It will shave around £26 a month off mortgage payments for those who borrowed £200,000 over 25 years, according to the Council of Mortgage Lenders.
But for savers it will mean even lower returns on their nest-eggs after more than 1,000 rate reductions already during 2016 alone.
Chancellor Philip Hammond welcomed the MPC’s action and, in a letter to Bank governor Mark Carney, added that he was “prepared to take any necessary steps to support the economy and promote confidence”.
He said: “The vote to leave the EU has created a period of uncertainty, which will be followed by a period of adjustment as the shape of our new relationship with the EU becomes clear and the economy responds to that.
“The Governor and I have the tools we need to support the economy as we begin this new chapter and address the challenges ahead.”
In its quarterly inflation report, the Bank warned there would be “little growth” in the second half of the year, forecasting the economy to almost flat-line at 0.1% in the third quarter.
It said the Brexit vote has seen its forecasts slashed by around 2.5% over the next three years, which is the steepest downgrade ever between two inflation reports.
The Bank kept its growth forecast at 2% for 2016, thanks only to a far better-than-expected 0.6% rise in the second quarter, but it sharply reduced the outlook to 0.8% in 2017 and 1.8% in 2018.
It had previously predicted growth of 2.3% in both 2017 and 2018.
The Bank said the Brexit vote has had a “pronounced effect” on the outlook for Britain’s economy.
“Demand was expected to be markedly weaker and unemployment higher than in May,” the minutes revealed.
The quarterly inflation report reveals that the rate of unemployment is expected to rise to 5.5%, while it also predicts house prices will fall slightly over the year ahead, before gradually recovering.
Minutes of the MPC meeting show that, while all nine members voted for a rate cut, they were split over the decision to extend QE and launch a corporate bond-buying programme, voting 6-3 and 8-1 respectively.
All members agreed to a new scheme to encourage banks to lend, called the Term Funding Scheme, which is similar to the current Funding for Lending Scheme.
It will offer banks access to finance at cheap rates on the condition they do not reduce lending to households and businesses - designed to address fears that the rate cut will hit their profit margins and not be passed on to borrowers.
More details on its corporate bond-buying programme will be given in September, but the Bank said it will only be used for firms that make a “material contribution to the UK economy”.
The pound dropped by more than 1.5 cents against the dollar on the news, falling to 1.31 US dollars.
Sterling also took a dive against the euro, falling more than a cent to 1.18.
The FTSE 100 rose sharply, moving into positive territory and hitting 6,702 points.