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Bank of England cuts interest rate to record low of 0.25%

Bank of England

UK interest rates have been cut from 0.5% to 0.25% to the lowest level recorded. It is the first time the interest rate has been cut since 2009.

The Bank of England (BoE) has also reduced its growth prediction for next year from the 2.3% it was expecting in May to 0.8%. The cut to 0.25% was expected following comments by Dr Martin Weale, an independent member of the Bank of England’s Monetary Policy Committee, last week.

The BoE expects the UK to avoid a recession with a forecast of 0.1% growth in Q3 this year.

Sue Robinson, director of the National Franchised Dealers Association, said: “Low interest rates represent an incentive for consumers who want to commit to larger purchases -including cars, and we believe this decision will continue to support the car market, in particular, after the vote turmoil.

“We also urge finance houses and banks to pass the cut on to consumers as a stimulus to spending.”

The nine members of the Monetary Policy Committee (MPC) voted unanimously to cut the rate.

The MPC admitted that while the rate cut will lower borrowing costs for businesses and households, being so close to zero means it will be difficult for some banks to reduce deposit rates further, which will limit their ability to cut their lending rates.

Term Funding Scheme

In order to mitigate this, the MPC is launching a Term Funding Scheme (TFS) that will provide funding for banks at interest rates close to Bank's rate of 0.25%. Under this new TFS the Bank will create up to £100bn of new money to provide loans to banks at interest rates close to the base rate of 0.25%.

The MPC said: "This monetary policy action should help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that households and firms benefit from the MPC’s actions. 

"In addition, the TFS provides participants with a cost effective source of funding to support additional lending to the real economy, providing insurance against the risk that conditions tighten in bank funding markets."

A statement from the Bank of England said the UK's decision to leave the European Union had a knock on effect with the exchange rate and the outlook for growth in the short to medium term has "weakened markedly".

It said: "The fall in sterling is likely to push up on CPI inflation in the near term, hastening its return to the 2% target and probably causing it to rise above the target in the latter part of the MPC’s forecast period, before the exchange rate effect dissipates thereafter.

"In the real economy, although the weaker medium-term outlook for activity largely reflects a downward revision to the economy’s supply capacity, near-term weakness in demand is likely to open up a margin of spare capacity, including an eventual rise in unemployment.  Consistent with this, recent surveys of business activity, confidence and optimism suggest that the United Kingdom is likely to see little growth in GDP in the second half of this year."

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