Interest rates cut to 0.25%

In the first move to change interest rates since the crash in 2009, the Bank of England (BoE) has cut rates from 0.5% to 0.25%, making it a record low

The Monetary Policy Committee (MPC) has voted for a package of measures to provide support to the UK economy in a meeting on 3 August, following signs of economic instability after Brexit.

The package includes a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 bn of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 bn, taking the total stock of these asset purchases to £435 bn.

Commenting on BoE decision to cut interest rate Dr Rebecca Harding, chief economist at the British bankers association, the BBA said: ‘The decision to cut interest rates and increase quantitative easing sends a clear signal that the Bank of England is taking a “whatever it takes” approach to stabilising the economy.

‘Weak post-Brexit data is creating a perception that the economy is likely to slow and the decision to reduce rates has been made on the basis of a perception of risk.’

The BoE said that ‘purchases of corporate bonds could provide somewhat more stimulus than the same amount of gilt purchases. In particular, given that corporate bonds are higher-yielding instruments than government bonds, investors selling corporate debt to the Bank could be more likely to invest the money received in other corporate assets than those selling gilts.

‘In addition, by increasing demand in secondary markets, purchases by the Bank could reduce liquidity premia; and such purchases could stimulate issuance in sterling corporate bond markets.’

The announcement created further instability as the pound fell 1% against the dollar to £1.31 but the FTSE 100 rose indicating that listed companies welcome the move.

CBI chief economist, Rain Newton-Smith, said: ‘The Bank’s action will help restore confidence in the UK economy and what’s now most important to businesses is that the government develops a clear plan and timetable for EU negotiations.

‘At the same time, it must press ahead with domestic policy priorities, especially infrastructure decisions, which will allow firms to get on with serving their customers and investing for the future.’

The change to gilt also has an effect to pensions, Alex Hutton-Mills, managing director of Lincoln Pensions comments: ‘Trustees and companies need a clear understanding of the correlation of risks between sponsors and pension schemes. This is both in terms of benefit structure and asset allocation, in light of the covenant, which can be done through proportionate scenario testing.’

However, despite the cut to interest rates the jobs market is still far from certain and action is required in the Autumn Statement. Jo Sellick, managing director of financial recruitment firm Sellick Partnership said: 'The reality is that any lowering of rates typically takes around nine to 12 months to have any sort of tangible impact on the economy and it is too soon to predict exactly what this impact will look like, especially given the current political uncertainty. The Purchasing Manager’s Index (PMI) fell off a cliff in July, the sharpest drop on record, and other economic indicators suggest that there will be a soft recession in the last quarter of this year and into the first quarter of 2017.

'So, what does this mean for the jobs market? The only thing that we know for sure is that the entire economy and public confidence is uncertain, and this will be reflected in attitudes of employers. The Bank of England expects the unemployment rate to rise to 5.4% next year and 5.6% in 2018, as well as reducing its growth forecasts for 2017.'

Amy Austin |Reporter, Accountancy Daily [2016-2019]

Amy Austin was reporter, Accountancy Daily and Accountancy magazine, published by ...

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