Interest rate rises

Bank of England base rates

On Thursday, the Bank of England cut the Bank’s base rate for the first time in more than seven years. The decision to slash it from 0.5 per cent to 0.25 per cent comes after weeks of speculation that the central bank must act.

It may not seem like much. But a move in the base rate is something that reverberates around the world.

The Bank's monetary policy committee said it was presented with a "trade-off" between meeting inflation targets and stabilising activity. It stated: "Following the United Kingdom’s vote to leave the European Union, the exchange rate has fallen and the outlook for growth in the short to medium term has weakened markedly."

It said it was "appropriate" to provide additional stimulus to the economy, in the form of lower interest rates, cheap funding for banks and an expansion of the asset purchase programme that underpins quantitative easing.

Speaking later at a press conference, Bank of England boss Mark Carney said banks had "no excuse" not to pass on the rate cut. Santander has confirmed it will do so, but other banks have been more reticent.

The decision has the potential to affect everyone in Britain, from savers to mortgage borrowers and those relying on public services. This is what you need to know.

1. The Bank rate is already historically low

Like other major central banks, the Bank of England slashed rates in response to the global financial crisis. When it dropped the rate to 0.5 per cent in March 2009, it hoped to ease pressure on mortgage borrowers and give the government breathing space to deal with debt.

Before that, the Bank base rate had been considerably higher – it was 5.75 per cent in July 2007 and 7.25 per cent in October 1998.

2. The Bank was expected to hike rates, not drop them

When the current governor, Mark Carney, arrived in July 2013, most financial commentators saw his main task as gradually raising the Bank base rate to a “normal” level as the economy recovered. He even set out conditions in a bid to curb speculation. The fact that the Bank of England is now cutting rates demonstrates how significantly the economic environment has changed.

3. The Bank rate affects mortgage rates

Homeowners with a variable, or tracker, mortgage pay a monthly rate that is pinned to a lender’s standard variable rate, which in turn is pinned to the Bank of England’s base rate. A cut in the base rate is good news for them. Imagine a family paying back a 20-year mortgage worth £250, 000 at a rate of 2.86 per cent. If this dropped to 2.61 per cent – a quarter point drop – the Council of Mortgage Lenders calculates they would get a £32.80 discount each month.

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