Belfast Telegraph

Friday 18 April 2014

Interest rates could be cut beyond historic low of 0.5%

Cutting interest rates beyond the record 0.5% remains a weapon to combat the weakening economy, the Bank of England has indicated .

Members of the Monetary Policy Committee (MPC) opted to pump more emergency cash into the economy earlier this month, but not before discussing in more detail the possibility of a first cut in rates since March 2009.

Minutes of the July meeting revealed the notion that a new £80bn "funding for lending" scheme aimed at kick-starting bank lending could lessen fears about the impact of a rate cut on lenders' margins.

In the end, members of the nine-strong committee voted overwhelmingly to keep rates on hold but admitted on the subject of interest rates that they will "review this option again". They voted seven-to-two in favour of increasing quantitative easing by £50bn to £375bn.

Vicky Redwood, chief UK economist at Capital Economics, said: "Members signalled that a rate cut was still possible further ahead, although only after the effects of the funding for lending scheme become apparent."

A reduced rate would be the lowest in the Bank's 318-year history, with a cut to 0.25% saving a borrower with an average lifetime tracker rate on a £200,000 mortgage £328.56 a year, according to comparison site Moneyfacts.

But lower borrowing costs would deliver yet another blow to Britain's savers, who have lost out since rates hit the current low in March 2009.

The Bank's main concern over a rate cut beyond 0.5% is the impact it could have on some banks' and building societies' ability to lend.

Lenders have assets, mainly mortgages, with interest payments contractually linked to the Bank's rate and a reduction below 0.5% might squeeze some lenders' interest margins to the point at which they become less able to offer new loans to customers.

The funding for lending scheme, launched last Friday by the Bank and the Treasury, is designed to unclog credit by offering banks cheap finance.

Malcolm Barr, head of UK economic research at JP Morgan, said: "If take-up of the funding for lending scheme is high, particularly among the building societies, and the MPC begins to express a few doubts about the effectiveness of QE, then a cut in Bank rate would start to look more likely if more stimulus is still needed."