Bank of England cuts interest rates by 0.25%

The Bank of England headquarters at Threadneedle Street, London

The Bank of England has moved to bolster the worsening economy by cutting interest rates to their lowest ever level.

The nine-member Monetary Policy Committee voted 9–0 to cut the Official Bank Rate to 0.25%. It also announced further monetary stimulus measures, including more quantitative easing and cheap funding for commercial banks.

The Bank had held the Official Bank Rate steady at 0.5% since March 2009. Today marks not only the first time the benchmark rate has fallen in over seven years, but also its lowest ever level.

UK markets expected an interest rate cut

In the run up to the announcement, markets considered a 25 basis point cut a near certainty. Shortly after opening on Thursday Morning, the FTSE 100 fell by three points, while shares in commercial banks rose in anticipation of more funding.

Meanwhile, the pound fell by more than 1% against the dollar.

The outlook for growth ‘has weakened markedly’

In its official statement, the Committee observed that following the vote to leave the EU, the exchange rate has fallen and the outlook for growth … has weakened markedly.

A lower benchmark rate will add to inflationary pressure. But the Bank also believes that it will bolster economic activity. It reasons that increased stimulus is worth a temporary period of above-target inflation. This, the Bank states, will enable an eventual return to more stable, on-target inflation.

The majority of Committee members expect a further cut later in the year. According to the report, rates are likely to end the year close to, but a little above, zero.

The rate cut is not the only stimulus measure announced

As expected, the Bank of England also announced an extension to its quantitative easing programme. It will create a further £60 billion in electronic funds to buy government bonds (gilts), bringing the total up to £435 billion.

The Bank will also generate a separate £10 billion fund to buy corporate bonds. And it made a surprise announcement: a new ‘term funding scheme’ will provide up to £100 billion in low-cost loans to commercial banks, encouraging them to continue to lend to consumers and businesses.

Does this mean that borrowing will get even cheaper?

Even with the base rate falling, some banks and building societies struggle to lower loan rates. This is because their deposit rates are already so low. The margin between the money they pay to savers and the interest they charge dictates how cheap their products can be.

To prevent trading losses, some banks have even threatened to set negative interest rates on savings accounts.

The additional stimulus measures the Bank of England has proposed will make cheaper funds available to commercial banks. This should help the cut in the base rate pass through to the real economy. The Bank is confident that the stimulus package “will lower borrowing costs for households and businesses”.

What does this mean for your property business?

The property market is heavily reliant on interest rates. The cut could mean savings for borrowers on variable rates, further rate cuts to come, and cheaper funding available for new buyers.

Buy-to-let mortgage lenders appear to have been predicting such a move. Fixed rates have fallen in line with gilt yields. Short-term tracker rates have risen in places, while in others, popular lifetime trackers have fallen. And many lenders have been improving their criteria to attract new business.

Meanwhile, despite an uncertain short-term outlook, the long-term prospects for the property market remain good. The UK’s need for rental properties is growing no less acute. And as deposit rates take yet another hit, saving for a deposit on a first home is likely to get even more difficult.

Between a still-thriving rental sector and ever-improving financial conditions, buy-to-let investors remain in a good position.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.