Pound plunges as Bank of England cuts interest rates for the first time in seven years

A dramatic set of figures show UK economy will virtually grind to a halt because of decision to leave the EU

Hazel Sheffield
Friday 05 August 2016 09:14
Comments
The pound plunged after the Bank of England's decision to cut interest rates
The pound plunged after the Bank of England's decision to cut interest rates

The pound slumped 1.4 per cent after the Bank of England's decision to cut interest rates to an historic low of 0.25 per cent.

The pound slid to trade at $1.3145 against the dollar after Mark Carney, the Bank’s Governor, promised the Bank would deliver more quantitative easing to prop up the UK economy amid a damning set of GDP growth forecasts.

A dramatic set of figures showed the UK economy will virtually grind to a halt because of the decision to leave the European Union, with GDP growth to slump to 0.1 per cent in the third quarter of the year.

As well as slashing interest rates from a seven-year low of 0.5 per cent, the Bank of England said it would lend as much as £100bn to banks to ensure the stimulus reached the economy.

The new plans add up to a total £170bn spent on propping up the UK economy since the financial crisis of 2008.

The pound dropped immediately after the announcement, signalling that the package of measures went much further than traders were expecting.

It had been trading down slightly ahead of time, signalling that markets had already priced in a package of measures.

Analysts said that looser monetary policy, coupled with a declining pound and a high trade deficit, could lead to higher inflation.

"This may need to be checked by interest rate increases within six to nine months, which are likely to rise faster and higher than current market expectations," said Nick Dixon, investment director at Aegon.

While lower rates should benefit borrowers and hit savers, banks and other lenders are not obliged to pass on the rate cut.

Gillian Guy, CEO of Citizens Advice, urged them to do so.

"Having interest rates at a record low could take some of the pressure off people struggling with unmanageable debt," Ms Guy said.

"With levels of unsecured debt like credit cards and personal loans now rising faster than incomes, lower interest rates could provide some relief for people worried about their financial future," she added.

In a press conference following the rate cut, Mark Carney also urged banks to pass on the cut.

"Banks have no excuse not to pass this on," he said.

Guy Anker, managing editor of MoneySavingExpert.com, said that savers should ditch accounts with poor interest rates in saving accounts and opt for higher rate current accounts instead.

"Get creative as you can gain more in a top current account - some pay 3-5 per cent compared to 1 per cent-ish on standard savings accounts. Of course, the rate on any account may drop so those rates may not be quite as attractive in future. Another option is to use spare cash to clear expensive debt, as long as you have access to an emergency fund for a rainy day," he said.

Register for free to continue reading

Registration is a free and easy way to support our truly independent journalism

By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists

Please enter a valid email
Please enter a valid email
Must be at least 6 characters, include an upper and lower case character and a number
Must be at least 6 characters, include an upper and lower case character and a number
Must be at least 6 characters, include an upper and lower case character and a number
Please enter your first name
Special characters aren’t allowed
Please enter a name between 1 and 40 characters
Please enter your last name
Special characters aren’t allowed
Please enter a name between 1 and 40 characters
You must be over 18 years old to register
You must be over 18 years old to register
Opt-out-policy
You can opt-out at any time by signing in to your account to manage your preferences. Each email has a link to unsubscribe.

Already have an account? sign in

By clicking ‘Register’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged in