Many commentators had forecast the cut ahead of the announcement today. The decision breaks the rate freeze, which has been in place since March 2009.
The BoE also announced an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.
MPC vote to cut #BankRate to 0.25% and for a package of measures designed to provide additional monetary stimulus pic.twitter.com/vyqHCgYork
— Bank of England (@bankofengland) August 4, 2016
The decision for a cut to 0.25% was widely expected to have been taken last month – but only one member of The Bank of England's Money Policy Committee voted this way on 13 July. Eight voted last month to keep it at 0.5%.
Governor of the Bank of England Mark Carney has written to the Chancellor to explain the move. He said: "The MPC has today announced a package of measures designed to provide additional support to the economy and to achieve a sustainable return of inflation to the target. This package comprises: a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme (TFS) to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of sterling non-financial investment-grade corporate bonds issued by firms making a material contribution to the UK economy; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion. The last three elements will be financed by the issuance of central bank reserves.
"This package of monetary policy stimulus measures contains a number of mutually reinforcing elements, all of which have scope for further action. The MPC can act further along each of the dimensions of the package by lowering Bank Rate, by expanding the TFS to reinforce further the monetary transmission mechanism, and by expanding the scale or variety of assets purchases. If the incoming data prove broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC's forthcoming meetings during the course of this year. The MPC currently judges this bound to be close to, but a little above, zero."
Reaction
Yvonne Braun, ABI Director of Policy, Long-Term Savings and Protection, said: “Today’s decision will be disappointing news for customers looking to buy an annuity. While we recognise there are wider economic judgements underlying this decision, continued low interest rates and sustained quantitative easing are the main factors keeping annuity rates low.
"This further drop of the interest rate to unprecedented low levels and the additional injection of quantitative easing are likely to put downward pressure on annuity rates.”
Nick Dixon, Investment Director at Aegon, said: “Today’s rate cut should mitigate risk of a downturn after a slew of disappointing post-Brexit economic data. Low rates started as an exceptional measure to stabilise the economy and now seem to be the new normal. The big question is will a 0.25% rate last long. Looser monetary policy, coupled with declining pound and a structurally high trade deficit, will lead to higher inflation. This may need to be checked by interest rate increases within 6-9 months, which are likely to rise faster and higher than current market expectations.”
Russ Mould, investment director at AJ Bell, said: “Markets have been pricing in a loosening of monetary policy ever since the Brexit vote so today’s move by the Bank of England is likely to be welcomed by equity investors but is bad news for people with cash savings.
“There is a big question mark over whether the rate cut will truly make any difference to the economy. Headline borrowing costs have stood at record lows for more than seven years, yet economic growth has remained sluggish. It is debateable whether lenders will reduce their variable rate mortgages but highly likely that savings rates will be slashed further.
“There is already a desperate hunt for income and a further reduction in bank savings rates will do nothing to help this. So the outcome may be that we see no pick-up in economic growth with people looking for an alternative home for their savings rather than spending more.
“History shows that interest rate cuts can boost stock prices with markets having jumped over 8% in the six months following previous cuts in interest rates since 1970.
“Overall, stock markets may welcome today’s move in the short-term, with sterling a possible sacrificial lamb but as always there will be winners and losers."
Claire Trott, Head of Pensions Technical at Talbot and Muir said: “The reduction in interest rates from 0.5% to 0.25% although disappointing for those looking to hold their pensions in cash, will really have little impact on SIPPs and SSAS. These types of pensions tend to hold very little in cash or have cash held in fixed term deposits, which won’t immediately be impacted by these changes.
"It again reiterates that having professional investment advice is key for money purchase pension schemes because those with investment managers would already have been prepared for this change and made appropriate pre-emptive changes should that have been required. SIPPs and SSAS do give members greater options to invest in tangible assets, such as direct commercial property, which tend to be less volatile.
“There will be a certain amount of cash held in default deposit accounts within SIPPs and SSAS but these are not investment accounts and should not be treated as such, they are transactional so the interest rate paid on them will have little impact to a members overall pension strategy.
“Defined benefit schemes will likely take the brunt of the impact because it is likely to increase any deficits they have within their schemes. This won’t directly impact on the members today, but it could mean that the employer will need to put in extra cash to the scheme to reduce the deficit leaving less money for other things, such as bonuses or pay rises in the longer term.”
Abi Oladimeji, Chief Investment Officer at Thomas Miller Investment, argues that the Bank of England’s decision to cut interest rates is a step in the right direction but further policy support will be required in due course.
He said: “The UK’s economic performance in the second quarter of 2016 was encouraging. However, that may well have been one last hurrah! Indeed, the underlying data suggests that Q2’s strength boiled down to a particularly strong April. Earlier in the year, we highlighted the EU referendum as a prominent source of risk to the UK economy and financial markets. That risk has now crystallised. The Bank of England’s decision has to be seen in this context.
“Post-referendum, the UK faces a lengthy period of uncertainty. In the shorter term, this will result in lower investment and consumption. The severity of the short term impact will depend on the extent of the response from the Bank of England. As things stand, the risks of a UK recession at some point over the next year are finely balanced. In this context, the MPC’s decision to cut interest rates is a step in the right direction but it seems likely that further policy support will be required in due course.
“Having guided the markets to expect a rate cut, the Bank’s decision to leave rates on hold last month wrong-footed investors. In that context, anything other than a rate cut today would have undermined investors’ confidence in the Bank of England."
James de Sausmarez, Head of Investment Trusts at Henderson Global Investors, said: “Human beings are naturally risk adverse. It’s a cognitive bias that is hard to overcome when we consider our savings. This flaw in our thinking compels us to cling to the nominal cash value of our savings, so in recoiling from taking investment risks, we unwittingly suffer the corrosive effect of inflation. Our research shows you can be near certain you will lose money over the longer term by putting your savings in cash accounts, as the cost of living, and expectations for living standards will quickly climb out of reach of the paltry returns on cash deposits. It’s costing us billions of pounds every year.”
Dr Rebecca Harding, BBA chief economist, 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.
“As a package, the measures announced will provide greater certainty for individuals and businesses so they can plan for the future. The Bank of England’s base rate had remained at a record low since 2009 before being cut further today. While this has been good news for borrowers it has also led to tough times for many savers. We always encourage customers to shop around for the best deal for them in this low interest rate environment.”