Bank of England signals rate cut possibility

 

Cutting interest rates beyond the record low of 0.5% remains a weapon to combat the weakening economy, the Bank of England indicated today.

Members of the Monetary Policy Committee (MPC) opted to pump more emergency cash into the economy earlier this month, but not before discussing in more detail the possibility of a first cut in rates since March 2009.

Minutes of the July meeting revealed the notion that a new £80 billion "funding for lending" scheme aimed at kick-starting bank lending could lessen fears about the impact of a rate cut on the margins of lenders.

In the end, members of the nine-strong committee voted overwhelmingly to keep rates on hold but admitted on the subject of interest rates that they will "review this option again". They voted seven-to-two in favour of increasing quantitative easing by £50 billion to £375 billion.

Vicky Redwood, chief UK economist at Capital Economics, said: "Members signalled that a rate cut was still possible further ahead, although only after the effects of the funding for lending scheme become apparent."

A reduced rate would be the lowest in the Bank's 318-year history, with a cut to 0.25% saving a borrower with an average lifetime tracker rate on a £200,000 mortgage £328.56 a year, according to comparison site Moneyfacts.

But lower borrowing costs would deliver yet another blow to Britain's savers, who have lost out since rates hit their current historic low in March 2009.

The Bank's main concern over a rate cut beyond 0.5% is the impact it could have on some banks' and building societies' ability to lend.

Lenders have assets, mainly mortgages, with interest payments contractually linked to the Bank's rate and a reduction below 0.5% might squeeze some lenders' interest margins to the point at which they become less able to offer new loans to customers.

The funding for lending scheme, launched last Friday by the Bank and the Treasury, is designed to unclog the flow of credit by offering banks cheap finance and cushion the impact of a rate cut on banks' margins.

Malcolm Barr, head of UK economic research at JP Morgan, said: "If take-up of the funding for lending scheme is high, particularly among the building societies, and the MPC begins to express a few doubts about the effectiveness of QE, then a cut in Bank rate would start to look more likely if more stimulus is still needed."

The minutes said the impact of the funding for lending scheme could "alter" its assessment of a rate cut, although this was unlikely to be for several months.

Under the scheme, British banks are being offered funding at low interest rates over a four-year period - but it will be directly linked to bank lending performance to encourage lenders to increase loan availability and reduce rates.

However, other analysts remained sceptical. Howard Archer, chief UK and European economist at IHS Global Insight, said: "The MPC is prepared to re-visit the case for lower interest rates, although the indications are that this will not happen any time soon and we remain doubtful that interest rates will go below 0.5%."

The economy is in a double-dip recession after contracting by 0.3% in the first quarter of 2012 and declining 0.4% in the final three months of last year.

Meanwhile, inflation has pulled back from 5.2% last September as the impact of the VAT hike fades and energy and commodity prices fall.

The near-term picture for growth is "somewhat weaker" than the Bank's assessment last May, the Bank's minutes added, and the UK is now potentially facing a period of two years where there has been "little or no economic growth".

Survey data continued to weaken in the month before the meeting, the MPC said, while there were increasing signs that the eurozone crisis was hitting UK growth.

The minutes added: "Information during the month suggested export prospects had weakened, which would further impede the UK economy's rebalancing away from domestic demand towards net exports."

PA

Start your day with The Independent, sign up for daily news emails
News
i100 In this video, the late actor Leonard Nimoy explains how he decided to use the gesture for his character
Arts and Entertainment
Secrets of JK Rowling's Harry Potter workings have been revealed in a new bibliography
arts + ents
News
Robert De Niro has walked off the set of Edge of Darkness
news The Godfather Part II actor has an estimated wealth of over $200m
Arts and Entertainment
Fearne Cotton is leaving Radio 1 after a decade
radio The popular DJ is leaving for 'family and new adventures'
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower