Further action may still be needed to revive the UK economy, Bank of England officials admitted yesterday, after interest rates were slashed to the lowest levels on record.
Along with a cut in base rates to 0.25 per cent – the lowest in the central bank’s 322-year history – policy-makers delivered an emergency package worth up to £170 billion to ward off recession following the Brexit vote.
It marks the first reduction in borrowing costs since March 2009, when the Bank reduced them at the height of the financial crisis.
A package of measures was also unveiled in an attempt to boost a sharply slowing economy in the wake of the EU referendum vote, with the Bank revealing its biggest growth downgrade since quarterly inflation report records began.
There will be a programme worth up to £100bn – the Term Funding Scheme – to encourage banks to pass on the historic low interest rate to households and businesses, while the Bank of England will also buy £60bn of UK government bonds and £10bn of corporate bonds.
Governor Mark Carney said that lenders had “no excuse not to pass on this cut in the bank rate” thanks to the package of measures, and suggested there was scope to cut rates even further.
The minutes of the latest rate-setting meeting revealed most members expect to cut rates to a “little above zero” by the end of the year if growth slows as expected.
But Mr Carney appeared to rule out the prospect of negative interest rates, saying he was “not a fan”.
Chancellor Philip Hammond welcomed the cut in rates, noting that the vote in June to leave the EU had created a “period of uncertainty, which will be followed by a period of adjustment as the shape of our new relationship with the EU becomes clear and the economy responds to that”.
But Scottish Friendly spokesman Calum Bennie said the efforts to ease monetary policy ran the risk of “promising much, but delivering very little”.
He said: “As many as five out of every six mortgage borrowers in the UK would see no immediate benefit from the cut, cash savings rates will become even worse and pensioners will suffer from even lower annuity rates.”
Royal Bank of Scotland said it was “currently reviewing whether we will make any changes to variable rate products” and “provide an update in the near future”.
Andy Willox, Scottish policy convener for the Federation of Small Businesses, said: “While these welcome moves from the Bank of England might be necessary to boost the economy, they may not be sufficient.
“Official figures show negligible Scottish economic growth at the start of this year while official UK-wide growth forecasts have been revised downwards. Depending on the impact of today’s change, we may need to see additional measures to boost local and national economies from all levels of government.”
The stimulus measures come despite inflationary concerns due to the fall in the value of sterling, making imports more costly. The Bank now predicts that inflation will hit 2.4 per cent in 2018 and 2019. It said the costs of trying to bring it back to its 2 per cent target would exceed the benefit.
According to the minutes, all nine members of the monetary policy committee voted for a rate cut, but they were split over the decision to extend quantitative easing and launch a corporate bond-buying programme, voting 6-3 and 8-1 respectively.
Mr Carney admitted savers would continue to suffer low returns after the rate cut, but assured they would benefit from a “better economic outcome” from rock bottom rates.
Laith Khalaf, senior analyst at financial services firm Hargreaves Lansdown, said: “The nightmare for savers continues, and they now face a lost decade of returns on their cash. If anything things are getting worse not just because savings rates will fall, but because inflation is forecast to rise.”