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Bank of England keeps interest rates on hold at 0.5% - as it happened

Financial markets were expecting a cut in rates ‒ the first for 7 years

Hazel Sheffield

Thursday 14 July 2016 15:02 BST

Mark Carney has signalled that rates may need to come down (Reuters)

Here are the latest updates:

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The Bank of England is expected to cut interest rates for the first time in seven years on Thursday.

Interest rates have been at a record low of 0.5 per cent for seven years in an attempt to stimulate the economy after the financial crisis.

The low rates are supposed to encourage businesses and households to invest by making it cheaper for them to borrow money.

But Mark Carney, the governor of the Bank of England, has signalled that rates may need to come down even further after the shockwaves that have been sent through the economy by the UK's surprise decision to leave the EU.

Interest rates are expected to come down from 0.5 per cent to 0.25 per cent. Financial markets are 70 to 80 per cent certain that Carney will make that decision at midday on Thursday.

Some think he may wait until August to make the decision.

“Initially August had looked more likely, but with economic data deteriorating and markets still nervous, it now looks probable the MPC will adjudge that immediate action is warranted," said Ben Brettell, senior economist at Hargreaves Lansdown.

Carney may choose to wait because there is limited economic data available to reflect the true effects of Brexit at this stage.

If he does cut the base rate, homeowners could get a lower rate on their mortgage.

6 ways Britain leaving the EU will affect you

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1/66 ways Britain leaving the EU will affect you

6 ways Britain leaving the EU will affect you

More expensive foreign holidays

The first practical effect of a vote to Leave is that the pound will be worth less abroad, meaning foreign holidays will cost us more

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6 ways Britain leaving the EU will affect you

No immediate change in immigration status

The Prime Minister will have to address other immediate concerns. He is likely to reassure nationals of other EU countries living in the UK that their status is unchanged. That is what the Leave campaign has said, so, even after the Brexit negotiations are complete, those who are already in the UK would be allowed to stay

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6 ways Britain leaving the EU will affect you

Higher inflation

A lower pound means that imports would become more expensive. This is likely to mean the return of inflation – a phenomenon with which many of us are unfamiliar because prices have been stable for so long, rising at no more than about 2 per cent a year. The effect may probably not be particularly noticeable in the first few months. At first price rises would be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum

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6 ways Britain leaving the EU will affect you

Interest rates might rise

The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates. This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output

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6 ways Britain leaving the EU will affect you

Did somebody say recession?

Mr Carney, the Treasury and a range of international economists have warned about this. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. But there is no doubt that the Leave vote is a negative shock to the economy. This is because it changes expectations about the economy’s future performance. Even though Britain is not actually be leaving the EU for at least two years, companies and investors will start to move money out of Britain, or to scale back plans for expansion, because they are less confident about what would happen after 2018

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6 ways Britain leaving the EU will affect you

And we wouldn’t even get our money back

All this will be happening while the Prime Minister, whoever he or she is, is negotiating the terms of our future access to the EU single market. In the meantime, our trade with the EU would be unaffected, except that companies elsewhere in the EU may be less interested in buying from us or selling to us, expecting tariff barriers to go up in two years’ time. Whoever the Chancellor is, he or she may feel the need to bring in a new Budget

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Someone with a 25 year £250,000 repayment tracker mortgage paying 2 per cent interest would see their monthly £1,100 repayment fall by around £30 if rates went down by 0.25 per cent.

But there are fewer people with these kind of tracker mortgages now than there were. Some 90 per cent of people who took out a mortgage in 2015 had a fixed rate. Those people will not be affected.

Savers may get an even worse deal than the sub 0.5 per cent rates offered by many accounts at the moment, though banks may hesitate before stripping any more interest from accounts, because rates are already so low.

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