Bank of England cuts base rate to 0.25%

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The Bank of England has cut base rate from 0.50 to 0.25 per cent.

The vote by the Bank’s Monetary Policy Committee was unanimous.

Most MPC members expect the rate to be cut to near zero by the end of the year.

But the Bank will also bring in a Term Funding Scheme to support mortgage lending.

This will be funded by central bank reserves. Chancellor Philip Hammond says this could reach £100bn, but that this depends on demand.

The Bank says: “The cut in Bank rate will lower borrowing costs for households and businesses.  However, as interest rates are close to zero, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn might limit their ability to cut their lending rates.

“In order to mitigate this, the MPC is launching a Term Funding Scheme that will provide funding for banks at interest rates close to Bank rate.

“This monetary policy action should help reinforce the transmission of the reduction in Bank rate to the real economy to ensure that households and firms benefit from the MPC’s actions.

“In addition, the TFS provides participants with a cost effective source of funding to support additional lending to the real economy, providing insurance against the risk that conditions tighten in bank funding markets.”

Ahead of the announcement markets were pricing in a rate cut with near certainty.

Coreco Mortgage Brokers director Andrew Montlake says: “In cutting the Bank base rate to a new historical low, the Governor has at least delivered on his pledge to help try to boost an ailing, post-Brexit economy.

“However, there is a risk that he has acted too early, potentially diluting a more powerful weapon to use in the future should the need arise.”

Montlake adds: “The immediate benefit of a cut will be felt by those mortgage borrowers with a tracker product who, for a 0.25 per cent cut, should see their monthly payments reduce by approximately £24.16 on a mortgage of £200,000 over an average 25-year repayment mortgage, or £41.66 if interest only.”

Montlake adds that this might not reduce mortgage rates due to many lenders using a collar that limits falls.

He adds: “Similarly lenders may not rush to reduce their standard variable rates as many will be keen to protect their margins and ensure they remain profitable.

“As far as fixed rates are concerned, swap rates have fallen dramatically since the Brexit vote so have to some extent already priced in a cut such as this.

“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.”

SPF Private Clients chief executive Mark Harris says: ‘It is important that lenders immediately pass on the full benefit of the cut to those on tracker-rate mortgages and those on products linked to their lender’s standard variable rate.

“Swap rates are at all-time lows and we expect to see even more competitive fixed rates in coming days. It is already possible to fix for two years at less than 1 per cent and for five years at less than 2 per cent. These are astonishingly-low rates but the could go cheaper still. Lenders are keen to lend and will need to be competitive in terms of the rates they offer in order to attract new business.”

In July the MPC voted by a majority of 8-1 to maintain the rate at 0.5 per cent.

One member, Gertjan Vlieghe, voted for a 25 basis point cut.

At the time the committee said it would likely change interest rates in August.