Bank of England interest rate cuts to 0.25% – what does it mean for you?

Toh. Igboro ti daru o! Outside have scatter! According to the BBC, UK interest rates have been cut from 0.5% to 0.25% – a record low and the first cut since 2009. Bank of England interest rate was slashed from 2007 but had held steady since 2009 as economic growth was witnessed.

There now seems to have been a turnaround as it would now seem that growth has stagnated. The Bank of England announced a range of measures to stimulate the UK economy including buying £60bn of UK government bonds and £10bn of corporate bonds.

The Bank also announced the biggest cut to its growth forecasts since it started making them in 1992.

It has reduced its growth prediction for 2017 from the 2.3% it was expecting in May to 0.8%.

The decision to cut interest rates to 0.25% was approved unanimously by the nine members of the Monetary Policy Committee (MPC) and is the first change in interest rates since March 2009.

The sharp decline is, in no small part, due to the Brexit referendum and the subsequent fall of the pound.

While a lot of this might seem like intangible information to the commoner on the street, the interest rate cut certainly will affect people, and here’s how:

1. Lower mortgage repayments

If you are still on a tracker mortgage, say hallelujah! This is because the banks are mandated to track the base rate and set their own percentages accordingly.

Many mortgage owners moved from the tracker mortgage a few years ago. This was in anticipation of a rise in interest rates as opposed to a drop. If, however, you are one of the high risk gamblers who stayed put, it would seem your gamble paid off!

2. Borrowing may become cheaper for businesses

This one is less clear cut. Certainly, the government urged banks to make funding more accessible to SMEs. One of the ways they suggested that this worked was to tie the lending rates to the bank rates. The problem with this arrangement however, is two-fold.

Firstly, the banks are less than keen to pass the savings created by the government on to businesses. There is little evidence that the banks are lending more than they did in 2009. In fact, it would seem that their lending policies are ever more stringent. There is even less proof that the lending rates are more favourable to customers.

Secondly, the rate of borrowing has actually reduced in recent years as business owners have lost their trust in the banks’ willingness to help grow their businesses. SMEs now look to personal loans, crowdfunding platforms such as IWOCA and CrowdCube, and other creative sources for raising funds for businesses.

That said, there is another bank scheme to boost business lending by banks called the Funding for Lending Scheme. And that may also be ramped up shortly.

3. Charges on business account credit balances??

This country can be really weird sometimes. Last week, the Royal Bank of Scotland created a shock-wave when it wrote to 1.3 million of their business customers warning that they might impose charges on credit balances if the Bank of England ultimately turns its base rate negative.

This means that other than the charges business customers incur for day-to-day transactions, they would also be charged for holding positive balances on their accounts.

While the new 0.25% rate might not bring about such stringent measures, it is worth noting that this may yet happen in the future if the base rate continues to crash.

4. Increase in share price

Another side effect of cuts in Bank of England base rates is a boost to share prices.

So, in theory, a cut should increase the value of your savings if you hold stocks and shares.

However, the Bank‘s Governor, Mark Carney says the difference might be negligible given the fallout from the Brexit vote.

5. More expensive holidays!!!

This is perhaps the most vicious consequence yet. I was still reeling from the thought that I might need to get a visa to go to Marbella in the future, and now this??

Interest rate cuts are often associated with falls in the exchange rate. This is usually thought to mean a weaker pound and therefore more expensive holidays for Britons travelling abroad.

After the initial crash and burn of the pound though, it would seem that it has rallied. This news might not affect your pesetas and cowrie shells just yet.

However, if you’re going on holiday soon it may not be such a great idea to change your sterling before the Bank’s decision is announced.