It was announced recently that the UK interest rates have now been cut from 0.5% to 0.25% by the Bank of England, which is a record low and the first cut since 2009.
Furthermore, the Bank of England has also signalled that rates could go lower if the economy worsens.
The BBC have stated that the Bank of England has also announced that ‘additional measures to stimulate the UK economy, including a £100bn scheme to force banks to pass on the low interest rate to households and businesses.’
It’s said that it will also buy £60bn of UK government bonds and £10bn of corporate bonds.
Governor Mark Carney said there was scope to cut the interest rate further.
He said that a majority of the nine-member Monetary Policy Committee (MPC) backed another cut if subsequent data showed the economy was deteriorating.
The governor additionally stated that banks have ‘no excuse’ not to pass on the lower borrowing costs to customers and will be charged a penalty if they fail to do so.
“The MPC is determined that the stimulus the economy needs does not get diluted as it passes through the financial system” – Governor Carney.
The Bank also announced the biggest cut to its growth forecasts since it started making them in 1993.
It has reduced its growth prediction for 2017 from the 2.3% it was expecting in May to 0.8%.
Mr Carney that the decision to leave the EU marked a ‘regime change’ in which the UK would “redefine its openness to the movements of goods, services, people and capital”.
How will the Interests rates effect you?
Here is a link by the BBC that runs over a few things.
Here is a breakdown to what they think.
They claim that a mortgage is by “far the biggest debt taken on by the majority of households in the UK.”
It’s said that an estimated ‘11.1 million households have one.’ The typical amount still left to pay on each home loan in the UK is £116,000, according to the Council for Mortgage Lenders.
Some Banks have quickly announced that they would “pass the cut on in full from September, with others expected to follow suit.” The BBC have also said that a “separate scheme announced by the Bank – called the Term Funding Scheme – is designed to ensure that banks pass on the rate cut.”
There are those on fixed rate mortgages – equating to nearly half (46%) of all mortgage holders.
They will see no change. However, if their mortgage term is up soon, they may find they pay less if and when they sign up to a new one. Fixed mortgage rates on new deals have been falling – even when there was no change to the Bank rate.
An increasing number of people have signed up to longer term fixed rate deals – locking them in for up to 10 years. For them, this change is fairly irrelevant.
The BBC supposedly say that the theory of a Bank rate cut is that “consumers see a cut in their mortgage bill, and a worsening return on their savings, so they go out and spend.” Hence, there is a boost to the economy and the same goes for businesses who will be more minded to invest.
That is the relatively simplistic explanation but it does make it clear that a Bank rate cut is bad for savers.
So overall as an example, “for anyone with £10,000 saved in such an account, they will receive £40 a year in gross interest, which is £25 less than before the cut.”
The Bank of England also added further stimulus measures to the rate cut – namely, the purchase of government and corporate bonds. So as the BBC state, this will have no effect on the state pension.
It will, however, add extra pressure on the deficits facing defined benefit pension schemes, such as final-salary pensions, putting increased pressure on businesses to plug that gap or reduce the availability of such pensions.
The decision by the Bank of England has led to a fall in the value of the pound, meaning exchange rates will be more expensive.
What do you make of the BBC’s articles and the interest rate cuts?
Is this all due to the aftermath of Brexit? Will cutting interest rates help stabilise the economy? Do you think that interest rates will fall further?
Comment below your views on the interest rates cut and the BBC’s articles below