Bank of England slashes interest rates for the first time in more than seven years

Rates slashed: Bank Governor Mark Carney
REUTERS

The Bank of England today slashed interest rates for the first time in more than seven years to stop Britain crashing into recession.

Millions of families were handed a welcome “Brexit bonus” as the Bank halved its benchmark lending rate from 0.5 per cent to a record low 0.25 per cent as part of a huge package of emergency measures.

A typical London borrower with a £300,000 tracker repayment mortgage will save just under £40 a month, while a home owner on an interest only deal will be around £62 better off.

The Bank’s nine member rate setting Monetary Policy Committee, which unanimously backed today’s move, also said it “expected” to reduce rates even further - to as low as 0.1 per cent - in the Autumn.

Other measures announced today include a resumption of “money printing” Quantitative Easing with the Bank of England buying up £60 billion of Government gilts and £10 billion of high grade company bonds over the coming months.

It has also launched a special lending scheme for banks and building societies that find it hard to make a profit during period of ultra-low interest rates.

The package, which was welcomed by Chancellor Philip Hammond, sent sterling falling sharply, and the FTSE 100 jumping, being up around one per cent on the day, or 65 points, ten minutes after the midday announcement.

Chancellor Philip Hammond backed the Monetary Policy Committee’s decision and linked it to the Brexit vote.

He said: “The vote to leave the EU has 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.

“It’s right that monetary policy is used to support the economy through this period of adjustment.”

Mr Hammond stressed he was prepared to take “any necessary steps to support the economy and promote confidence” in a letter to Bank Governor Mark Carney.

The cut came as part of the dramatic “Super Thursday” slew of announcements against a gloomy backdrop of a rapidly deteriorating economic outlook since last month’s EU referendum.

The Bank said the Brexit vote had resulted in “a pronounced shift” in the prospects for the British economy.

GDP is expected to inch ahead by just 0.1 per cent between July and September with “little growth” over the second half of the year as a whole.

It will then expand by a mere 0.8 per cent in the whole of next year, according to the Bank’s August Inflation Report. It had previously predicted 2.3 per cent growth for 2017.

Bank officials said this represented the biggest downgrade of a growth forecast between two reports since they began being issued in 1992.

The forecast for 2018 has also been slashed from 2.3 per cent to 1.8 per cent. The downgrades suggest that the country will pay a “Brexit bill” of around £45 billion in lost output as a direct result of the shock “Leave” vote.

However, the Bank expects the UK to narrowly avoid a “Brecession” with slow growth continuing throughout the next two years before starting to gather pace again.

Today’s Inflation Report also suggests that the Consumer Prices Index will rise to around 2.4 per cent by late 2018 as higher import cost of imports begin to feed into shop prices following the fall in the value of the pound.

Dole queues are also expected to lengthen with the unemployment rate rising to 5.6 per cent by 2018.

But nearly four million homeowners on tracker or variable rate mortgages will get an immediate boost to their disposable income as their monthly bills come down. The average borrower in London has a loan of £290,000.

Borrowers locked into fixed rate home loans, which already stand at historic lows, will not be immediately affected. However mortgage experts believe fixed rates could go even lower following today’s move.

Andrew Montlake, director at Coreco Mortgage Brokers said: “Although we do seem to be getting towards a point where lenders will be loath to cut any further, competitive pressure remains strong and should ensure the current crop of low rates continue for the foreseeable future, with the potential of even lower offerings over the coming weeks.”

It was the first interest move since the height of the financial crisis in March 2009 and takes the official cost of borrowing to its lowest level since the founding of the “Old Lady of Threadneedle Street” in 1694.

However, it is more bad news for pensioners living off their savings, who were among the most enthusiastic backers of Brexit in the June 23 poll.

It follows a run of increasingly sombre economic data in recent days. Yesterday a key survey pointed to the biggest fall in activity in the dominant services sector on record in July.

Earlier this week the National Institute of Economic and Social Research said it expected the economy to shrink by 0.2 per cent between June and September and that there is a 50 per cent chance of recession - two consecutive quarters of negative growth - by the end of next year.

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