The Bank of England (BoE) has cut the interest rate for the first time since 2009 to a record-low of 0.25%. The announcement on Thursday last week led to experts suggesting the cut has been made to prevent a post-Brexit recession by encouraging more borrowing and investing.
By reducing the cost of borrowing and putting several incentives in place, more businesses will want to borrow and more investors will want to lend, thus giving the economy a boost. As borrowing will become cheaper, more small businesses will be able to secure working capital or extra finance for expansion.
BoE has also invested £60 billion into the Quantitative Easing (QE) scheme to support banks and increase lending as part of a ‘package of measures designed to provide additional monetary stimulus.’
To incentivise banks to adapt their interest rate to the new Bank Rate, BoE has also introduced a £100 billion Term Funding Scheme to ‘cushion’ the impact of the change.
What do the experts say?
Chief economist, Rain Newton-Smith, of Confederation of British Industry (CBI) has said, “The bank’s action will help restore confidence in the UK economy and what’s now most important to businesses is that the Government develops a clear plan and timetable for EU negotiations.”
Despite being optimistic about the reduction in borrowing costs, the National Chairman of Federation of Small Businesses (FSB), Mike Cherry, commented, “Lower rates should lead to cheaper borrowing costs, making finance more affordable and helping to support business investment. Small firms will also welcome the boost to household spending power and consumer demand.”
However, he did have some concerns and went on to say, “There is a real risk that sterling will depreciate even further, which could benefit the UK’s visitor economy and small exporters, but could also affect prices, inflation and investment”.
“Medium-term forecasts indicate a slowing of the economy. We urge the Bank of England and the new Prime Minister to carefully assess the effects of today’s cut and do all in their power to boost economic confidence and growth.”
Mortgage borrowers and business owners look to benefit most from the interest rate cut but overall there has been positive reaction to the move. For the time being, it seems the Bank of England is signalling to businesses and consumers to spend rather than save.