Bank of England halves interest rates

The Bank of England (BoE) has cut interest rates from 0.5% to 0.25%, in a bid to stop the UK economy from falling into recession.

Last month eight of nine members on the BoE's monetary policy committee voted to leave rates unchanged. But this time around the decision to cut was unanimous.

The committee also voted to unleash a further bout of quantitative easing (QE). An additional £60 billion will be used to buy government bonds. A further £10 billion will be set aside to buy corporate bonds.

The move was widely expected, by both financial markets and economists, amid fears that June's Brexit vote will negatively impact the economy.

Various surveys have indicated that economic sentiment has dropped dramatically since the vote, although this was not reflected in the second-quarter GDP reading, which surprised on the upside.

Good for borrowers, bad for savers

The cut is good news for borrowers, but will not be welcomed by savers. The theory is lower rates will stimulate economic activity by encouraging spending.

BoE governor Mark Carney had hinted at a cut in a speech on 30 June, aimed at reassuring financial markets.

At the time he said vaguely that "some monetary policy easing will likely be required over the summer", a comment that misled the markets.

While the interest rate cut was widely expected, the move to extend QE took some market commentators by surprise.

According to Anthony Doyle, an investment director on M&G's retail fixed interest team, the BoE has acted pre-emptively ahead of a likely downturn in economic growth in 2017. In light of this the BoE cut its growth forecast for next year from 2.3% to 0.8%.

"Today's stimulus package highlights the shift in the BoE's approach to managing the economy. There is currently no statistical evidence that the labour market is deteriorating or that inflation is a problem.

"Faced with the economic uncertainty caused by the UK's decision to leave the EU, the Monetary Policy Committee has decided to act early, decisively and in size in order to limit the damage that a contraction in business investment and household consumption could have on the UK economy."

Stockmarkets reacted positively. Prior to the rate cut announcement, which was made at noon, the FTSE 100 was flat, up 0.03% at 6,632. The index instantly rose 1% following the rate cut. At 12.45pm the FTSE 100 was up 1.4%, to trade at 6,729.

The pound declined, slipping 1.4% against the US dollar, to trade at $1.3136. Gilt yields plummeted to new lows, falling from 0.8% to 0.65%. This serves as another blow for annuity providers.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.