CASH INJECTION
Blow for savers as Bank of England holds interest rates at 0.1% but prints £100bn in cash to help boost economy
INTEREST rates will be held at their record low of 0.1 per cent, the Bank of England has confirmed today - but it has agreed to print £100billion in cash to help boost the economy.
It's hoped the bailout package will help the economy recover from the devastating effects of almost three months in lockdown due to the coronavirus pandemic.
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All nine members of the Bank's Monetary Policy Committee (MPC) voted to keep the base rate the same, which fell to its lowest level in 400 years in March, to help reduce the economic shock of the pandemic.
It's bad news for savers because it means banks are unlikely to increase the interest they pay on already appallingly low savings accounts.
But on the flip side, keeping base rate low is good for borrowers who will continue to see low rates on loans, such as mortgages.
This typically benefits homeowners who are on variable rate or tracker deals that follow the performance of the base rate.
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 until the beginning of March when it was slashed to 0.5 per cent again.
The shock announcement at the end of March - where it dropped to 0.1 per cent - means it's now below a level not seen since before 2016.
Those on fixed deals are locked in so won't see any rate change until the term ends. But once their rate comes to an end they will be able to cash in on lower rates when they take out a new deal.
The decision to keep base rate at 0.1 per cent follows speculation from economists that the MPC would look to take rates below zero for the first time ever to pull the economy out of its nosedive.
This would be damaging to households who would effectively end up paying the banks to hold their cash.
Personal finance expert Laura Suter, from investment platform AJ Bell, said: "The flood of people saving money in lockdown together with a record low base rate means finding a decent savings rate is like trying to find loo roll at the start of the crisis – pretty tricky."
But Ms Suter said it could be worse, as at least savers "aren’t being pummelled by inflation too". Inflation, which is used to measure how the price we pay for goods and services changes, fell to 0.5 per cent yesterday.
Eight members of the MPC also voted to increase the central bank's bond purchase programme, which allows it to print more money. This is called Quantitative Easing (QE).
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The process sees the Bank buy government bonds from investors, pumping money into the economy in the process.
It does this to help keep inflation low, which in turn should encourage people to spend if prices are low, which should result in more money flowing to businesses and through the economy.
QE also tends to make it cheaper for households and businesses to borrow money by indirectly causing interest rates to fall, which again encourages spending.
It comes after official figures showed the economy contracted by a record 20.4 per cent in April.
A second quarter hit to the UK's GDP (gross domestic output) of 35 per cent, has been predicted by the Office for Budget Responsibility.
But the Bank said the fall in GDP between April and June may be not as bad as it set out in its gloomy May forecasts, thanks partly to a recovery in consumer spending and the housing market.
It now believes the second quarter plunge in UK GDP may be around 20 per cent compared with the final three months of 2019, rather than the 27 per cent it forecast in May's report.
In minutes of the MPC meeting, the Bank said: "The emerging evidence suggested that the fall in global and UK GDP in the second quarter would be less severe than set out in the May report."
But it warned there were risks of "higher and more persistent" unemployment following the crisis.
Melissa Davies, chief economist at investment firm RedBurn warned: "Although the GDP outlook is proving to be less negative than feared in May, the unemployment outlook is of increasing concern along with precautionary savings behaviour by households.
"Realistically, the government is likely to have to beef up unemployment support as the furlough scheme ends and the Bank will be in the market to help maintain low borrowing costs.
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"The negative interest rate debate will continue to rumble on over the summer."
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