Interest Rates Expected To Hit New Record Low

The Bank of England is expected to cut interest rates later for the first time in more than seven years, in a move forced on policymakers after Britain voted to leave the EU.

The governor, Mark Carney, hinted after the referendum result that the Monetary Policy Committee (MPC) could this summer cut the base rate and pump cash into the economy through its quantitative easing, or asset purchase programme.

Such moves would be aimed at stimulating growth in an economy that was already slowing ahead of the Brexit vote. 

Financial markets see a reduction in rates from 0.5% to 0.25%, with economists at Hargreaves Lansdown suggesting it is "now probable" rates will be cut at midday.

If they are, it will mark interest rates down below the 0.5% rate introduced by the Bank at the height of the financial crisis in 2009.

This would be good news for borrowers, and reduce many mortgage holders' monthly bills, depending on whether their deal is directly tied to the base rate.

Homeowners with fixed rate mortgages will not benefit from the cut until their deal expires.

Those on a 'tracker' mortgage will benefit immediately, as if interest rates fall, the tracker mortgage repayments will fall as well.

However it means a dismal outlook for savers, who have already seen their returns all but vanish.  

When interest rates drop, it will be even cheaper for banks to borrow money from wholesale funds, and therefore, they don't need savers' cash.

The knock-on effect, is that interest rates for savers may plummet further.

Rachel Springall, from the financial information website Moneyfacts.co.uk said the average rate for a two-year fixed bond has fallen from 3.34% in 2009 to 1.39% in July.

"A cut in interest rates is not necessarily guaranteed to be passed on in full by providers but it's clear to see this could ignite and opportunity for them to cut their savings interest rates further still," she said.

But, Mr Carney has stressed of his reluctance to reduce rates below 0.25%, and has warned: "If interest rates are too low or negative, the hit to bank profitability could perversely reduce credit availability or even increase its overall price."

The chief economist at IHS Global Insight, Howard Archer, believes that The Bank is utilising a number of measures to help bolster the economy, as well as cutting rates: "We suspect the Bank of England will extend its Funding for Lending scheme and it may very well also return to quantitative easing, which has been on hold since November 2012 with the stock purchases of £375bn."