RATE CUT
Bank of England slashes interest rates by 0.5% due to coronavirus
THE Bank of England has slashed the base rate by 0.5 per cent in emergency measures to tackle the impact the coronavirus outbreak is having on the economy.
It means the rate used by banks and lenders to set their own interest rates has dramatically dropped from 0.75 per cent to 0.25 per cent.
The Monetary Policy Committee (MPC) voted unanimously to reduce the rate for the first time since August 2016.
The unexpected move comes on Budget Day, the first one of Prime Minister Boris Johnson's government.
Rates have been reduced to help manage an "help to support business and consumer confidence at a difficult time".
"The Bank of England's role is to help UK businesses and households manage through an economic shock that could prove large and sharp but should be temporary," BoE boss Mark Carney said at a press conference.
If banks and building societies pass these on to consumers, it could be good news for borrowers, such as homeowners, who may see interest rates on loans drop.
But it means savers will also see the amount paid on their nest eggs weaken.
The BoE has also introduced a new term funding scheme with additional incentives for small and medium-sized enterprises (TFSME) to help lenders reflect the rate drop for customers.
The UK economy failed to grow at all in the three months to January, the Office for National Statistics (ONS) said today.
Analysts had expected gross domestic product (GDP) to grow by 0.2 per cent in January, fuelling fears that the UK could be heading towards a recession.
This is when an economy reports negative growth in two consecutive quarters.
What is the base rate?
SIMPLY put, it’s the country’s official borrowing rate, and is the rate the Bank of England lends to all the other banks in the UK.
It is incredibly important as it a guide for lenders on what rates it can offer – and therefore impacts mortgage rates, credit cards, loans and savings.
It was stuck at record low levels for a decade because of the state of the economy after the financial crash in 2008.
It was raised back to 0.5 per cent last November, the first of what many had hoped would be three hikes within three years.
The rate went up again in August 2018 to 0.75 per cent and has been held there ever since.
Today's shock announcement sent the rate back down again to levels not seen since 2016.
The number of confirmed cases of the deadly coronavirus has risen to more than 110,000 globally, with 373 reported in the UK.
Earlier this week the FTSE 100 plunged by more than 8 per cent, the biggest drop in a day since the 2008 financial crash.
Investors fear the impact of measures taken by countries to stop the spread of the virus, such as shutting factories and schools, will have a huge negative impact on the global economy.
A number of airlines have also taken an economic hit as holidaymakers ditch flying abroad to countries where the outbreak is prevalent, such as Italy, to stay at home instead.
Last night, Quantas cut nearly a third of all flights, while Flybe airline even called in administrators last week.
Supermarkets have also been impacted by the outbreak of the virus, with shoppers clearing shelves amid panic buying and stockpiling chaos.
The US made the dramatic decision to slash the Federal Reserve Bank's rate by 0.5 per cent last week.
Ex-Chancellor of the Exchequer Sajid Javid tweeted this morning: "Strongly welcome action by @bankofengland this morning.
"Absolutely right thing to do to support households and viable businesses during this economic emergency."
What does it mean for borrowers?
A drop in the base rate means that the amount you pay the lender to take out a loan is likely to fall too.
This includes credit cards, mortgages and personal loans.
Those on tracker and variable rate mortgages will feel the effect on bills as soon as their bank drops the rate inline with the base rate.
Unfortunately, those on a fixed-rate deal won't feel the benefit until their deal comes to an end and they take out a new one.
Alex Maddox, Capital Markets & Digital Director from Kensington Mortgages said: "For customers with tracker mortgages this rate change will be welcome and reduce their monthly payments very quickly.
"Fixed rates will not drop as quickly though, as lenders funding costs may still stay high even after this rate cut."
But Andrew Hagger of Moneycomms warned that it won't help as many people as you might think.
He added: "If your credit card provider is one that links your rate to base rate you will see cheaper borrowing costs but the impact will be minimal - 0.5 per cent less on a £2000 credit card balance equates to just £10 savings in interest in a year - less than a pound a month.
"It's those with overdrafts that could do with some help - but with most banks charging around 40 per cent interest, a 0.5 per cent cut isn't going to make any meaningful difference to peoples finances.
What does it mean for savers?
Sadly, it's not going to get any better for those who are fed up with earning next to nothing on their saving.
While the banks don't have to pass on the rate drop to savers, historically they always have.
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Andrew Montlake, from mortgage broker Coreco said: "Borrowers on a tracker rate will see an immediate benefit but savers will inevitably feel the squeeze.
"Strangely this does not necessarily mean rates will come down as lenders will be pricing in the fact that their own staff levels may be low in the weeks and months ahead and they may not be able to cope with the increased demand.
"Lenders will be in a tailspin this morning as they seek to get their heads around this drastic move from the Bank of England. We are living in truly unprecedented times."
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