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

PROMOTED VIDEO
News
video
Life and Style
tech
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
film
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Extras
indybest
News
Albus Dumbledore, the headmaster of Hogwarts School of Witchcraft and Wizardry has been the teaching profession's favourite teacher
education
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Luis Suarez looks towards the crowd during the 2-1 victory over England
sport
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
News
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sport
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Sport
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
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

Junior Research Analyst - Recruitment Resourcer

£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform