UK interest rates on hold

14th Jul, 2016

By Robert Little

Earlier today, in a move that surprised financial markets, the Bank of England’s Monetary Policy Committee (MPC) voted 8-1 in favour of leaving the Bank of England base rate at 0.5%.

Why was this a surprise?

Really this shouldn’t have been a surprise but (to many) it was nonetheless. The Governor of the Bank of England, Mark Carney, said in statement less than two weeks ago that in his opinion the base rate should be cut “over the summer” and that an initial assessment of the UK economy following Brexit would be made at the July MPC meeting. Financial analysts digested this statement and felt a rate cut from 0.5% to 0.25% in July was all but certain. In reality the vote of 8-1 was overwhelmingly in favour of keeping rates unchanged.

Could rates be cut in August?

Yes, the MPC makes an interest rate decision once a month so rates could be cut as soon as next month. According to the minutes of today’s MPC meeting many of the members indicated they would vote in favour of an interest rate cut next month, however this will of course depend on the economic data they receive in the meantime.

Is a rate cut good news for mortgages?

It depends. Interest rates on mortgages slot into 3 broad categories: fixed rates; tracker rates; and Standard Variable Rates (SVRs). A mortgage with a tracker rate will normally track changes in the Bank of England base rate, so any cut in the base rate should result in a fall in monthly mortgage payments. Standard Variable Rates are set by each lender based on a number of different factors, one of which is the base rate. So in theory a cut in the base rate could result in a fall in an SVR. However, given the fact base rates are already so low, many experts believe lenders will choose not to cut their SVR despite a fall in base rate. Fixed rates are (as the name suggests) unaffected by changes in the base rate, although in theory lenders may offer lower fixed rates for new customers if the base rate is cut.

Why is a rate cut needed?

Essentially a cut in interest rates normally delivers a boost to the economy. This is because borrowing – in theory* – becomes cheaper for individuals and businesses, so people are willing to spend more (rather than saving more) and businesses are willing to invest in new projects. It is widely expected that the UK economy will suffer some form of slowdown in the short term due to uncertainty surrounding Brexit. A rate cut should give the economy a “pick me up” and give greater confidence to the general public.

* This is only in theory because, as I described above, lenders may not pass on the benefit of a rate cut to borrowers and so borrowing might not actually get any cheaper.

So why wasn’t the base rate cut today?

This is because the Bank of England needs more time to study the short term effects of Brexit on the economy. They will be looking keenly at data such as flows of money into and out of the UK and the impact of a weakened pound on inflation. As we are still in the early days of Brexit the Bank would prefer to bide their time and see if there is an actual need for a rate cut rather than jumping the gun. A rate cut is a significant decision – particularly when the base rate is already at an all-time low – and it has some negative side effects such as a further weakening of the value of sterling. Really it is only sensible that a decision to keep rates unchanged was made today and it still leaves the door open for a rate cut at the August meeting of the MPC, should they feel this is needed.

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