Bank of England cuts base rate to 0.25%

With the announcement today by the Bank of England that it has cut its base rate to a new historic low, from 0.5% to 0.25%, millions of UK households and businesses will be asking what this actually means for them.

Mortgage payments

Anyone on a repayment tracker mortgage should indeed benefit and see a drop in their monthly mortgage repayment. However, as there are now more people on fixed rate mortgages, they unfortunately won’t benefit from the reduction in the base rate.

Share prices

Cuts in the Bank of England base rates should increase the value of your savings pot if your savings are held in stocks and shares. But it’s worth remembering though that financial market traders always look to make a profit by “pricing in” events that are expected before they happen whenever possible, and the cut was widely signalled by the Bank‘s Governor, Mark Carney since the week after the Brexit vote. So if a cut in the base rate is already priced in there may be little movement in share prices in response to an actual base rate cut.

Business borrowing

Traditionally, cuts to the Bank of England base rate meant borrowing was cheaper for businesses. Unfortunately however, since the financial crisis banks have been rather slow to pass on the reduction in the general cost of borrowing to firms.

As part of the package of measures designed to boost the economy following the UK’s vote to leave the EU in June, the Bank is also introducing a new Term Funding Scheme.  This will lend directly to banks at rates close to the new 0.25% base rate to encourage them to pass on the lower interest rates to businesses and households.

The cost of holidays abroad

Quite often, interest rate cuts are associated with drops in the exchange rate which means a weaker pound and more expensive foreign holidays. But just as the share traders do, market traders in foreign exchange look to price in events before they happen. This means that the bank could cut rates and there may not actually be any immediate reaction from the pound v the euro or dollar. Exchange rates are also very sensitive to shift expectations meaning that if the Bank’s monetary easing is less than the financial markets expect the pound could actually get stronger.