Base rate cut to record low
The Bank of England has announced that the base interest rate has been cut to another historic low of 0.5% after last month’s cut to 1.0%
By cutting the interest rate to its lowest ever level (again) the Bank of England’s Monetary Policy Committee is running out of tools to stimulate the country’s economy. Another concern is that such low interest rates will affect the banking sector’s profitability and potentially restrict further their ability and willingness to lend money.
Pressure will be upon the banks to help Small Businesses with variable rate loans and overdrafts but passing on the benefits of the interest rate cut to their SME customers.
However, the much talked about "quantitative easing" is being moved forward. Often referred to as "printing money" the untried (in the UK anyway) measure will not actually involve the issuing of a whole load of new bank notes but rather the purchase of government securities and corporate bonds to "create" new money, thus avoiding further borrowing. Initially thought to be a £75 billion injection there could be as much as a total £150 billion pumped into the UK economy via quantitative easing.
Commenting on the decision Ian McCafferty, CBI Chief Economist, said:
“With interest rates already at historic lows, the conventional rate cutting tool is becoming less and less effective as a means of stimulating the economy.
“Though this latest cut will help support business and consumer confidence, it is unlikely to have a dramatic impact on the cost or availability of credit.
“A swift move towards quantitative easing as a way of boosting money supply and lending directly is now the MPC’s best bet for supporting the economy and getting credit flowing again.
“In the current economic circumstances, the risks of higher inflation from such an action would be low.”