The Bank of England Base Rate is fundamental to finance at every level – from big business growth plans to the cost of your mortgage and the value of the pound in your pocket.
Rates are already low, with a base rate of 0.75% (compared with a historic average of around 5%) but now there is talk of cutting it. At Continuum, we are looking at the reasons behind this speculation, and the effect it might have on your financial plans.
Can they cut the interest rate?
The Bank of England interest rate is the main tool for regulating the economy. When things get too heated and the economy and inflation start getting out of control, the Bank of England Monetary Policy Committee, made up of the bank’s financial experts and led by the governor, may put interest rates up.
When there are financial slowdowns, or trouble ahead, they may cut the interest rate.
In the wake of the financial crisis 10 years ago, rates were cut to a historic low of 0.5% when the economy looked in real danger of grinding to a halt.
It looks as though the committee may currently be considering making a cut – but why?
Inflation is down
Inflation spiked around 18 months ago, hitting an uncomfortable 3% at one point as a weak pound meant imports were suddenly more costly. This caused the interest rate to be increased to its current level of 0.75%. Inflation has fallen dramatically, dropping to 1.3% last month, down from 1.5% in November, surprising City economists, who had expected the figure to remain steady.
The drop was further fuelled by retailers offering discounts in December to counter slow sales.
The economy is static
With the economy barely growing, or even shrinking according to some measures, there is little danger of inflation coming back in the near future, and it looks as though the economy could do with a shot in the arm. GDP data suggests an unwillingness to spend across the economy. An interest rate cut could get people spending and businesses investing again.
Brexit is coming
Of course, there is probably no financial topic that is immune from the effect of Brexit. The uncertainty about how the UK will fare after leaving Europe next week is one of the reasons the economy is depressed. A rate cut now would be a sign of confidence and help businesses who need to find new customers and suppliers to afford the investments they need.
The MPC and the Bank of England are independent and have no duty to reflect the bullish attitude of Boris Johnson, but they may see the need for a cut in the rate in the same light as the Prime Minister.
Certainly, Mark Carney, the outgoing Governor of the bank has spoken of his views and suggested that a rate cut may be part of the Brexit package. His rate hike in November 2018 was designed to deal with inflation – but it had the added effect of giving the bank room for another cut when Brexit was finally agreed.
A new man at the top
Of course, Mark Carney is stepping down from the role of Governor after 7 very turbulent years. His replacement Andrew Bailey, who will become the 121st governor of the Bank of England may have suggested that he will be following some at least of his predecessor’s policies. However, the mood of the MPC (which of course he will head) seems to be for a cut, and it would be an effective way to mark his own authority.
So, will they cut the interest rate?
City traders who spend their working lives trying to anticipate moves in interest rates seem convinced that the Bank will cut the official interest rate. Market indicators are said to suggest a 60% chance of it happening.
A rate cut could stimulate the economy, provide fuel for a Brexit boost and be very good for businesses of all sizes, but what about you?
If you have a mortgage, and particularly if you have a tracker mortgage, it could be good news, with a cut in your monthly outgoings. The news may not be so welcome if you have savings, and particularly if you are relying on the return on those savings.
However, at Continuum we may be able to provide some solutions. We can help you find the most rewarding home for your savings with our Cash Calculator or help you enjoy the prospect of better returns by discovering the power of investments, rather than savings.
If a rate cut could cause you some financial challenges, you may need some expert help. Simply call us at Continuum to get it.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
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