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Interest rates held at unprecedented 0.25% low

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Written by: Paloma Kubiak
15/09/2016
Interest rates have been held at their historic low of 0.25% in the first committee meeting since the first movement in seven and a half years last month.

The Monetary Policy Committee (MPC) voted unanimously today to maintain the Bank of England Base Rate at the record low of 0.25%, following its momentous decision in August to cut the rate from 0.5%.

At that time, it further announced it would continue its programme to purchase £60bn additional government bonds extending its asset purchase programme from £375bn to £435bn. It also confirmed it was forging on with the scheme of buying up corporate bonds totalling £10bn.

Addressing the reasons behind the vote, the MPC said the August move to cut rates to 0.25% had a greater than anticipated positive impact on UK asset prices.

The meeting notes stated: “Short and long-term market interest rates fell notably following the announcement; corporate bond spreads narrowed, and issuance was strong; and equity prices rose. Since then, some of the falls in yields have reversed, driven by somewhat stronger-than-expected UK data and a generalised rise in global yields.”

In its detailed economic outlook published in August, the MPC judged that the economy was likely to see little growth in the second half of 2016. However, it acknowledged that recent economic reports have been “stronger than expected”, though it will continue to monitor activity.

Tom Stevenson, investment director for personal investing at Fidelity International, said: “The Bank of England has spared UK savers another body blow this month but it hasn’t ruled out a drop to 0.1% in the future and there are suggestions that this could happen as early as November this year.

“With interest rates remaining at record lows, UK savers are unlikely to achieve a decent return by staying in cash. To stand any chance of generating a real return they’ll need to look further up the risk spectrum, investing in slightly riskier bonds issued by companies rather than the government or moving into stocks and shares.

“If anyone is unsure about the benefits of investing in the stock market over stashing cash under the mattress, our calculations show if you had invested £15,000 into the FTSE All Share index 20 years ago you would now be left with £55,105. If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with a paltry £20,100. That’s a difference of £35,005 – far too big for anyone to ignore.”

Turning to mortgage borrowers, while many lenders have cut their Standard Variable Rates and tracker mortgage rates, consumers should look to take advantage of low fixed rate deals currently being offered.

Ishaan Malhi, founder and CEO of online mortgage adviser Trussle, said: “Having cut the base rate to a historic low last month it was always doubtful we’d see a further reduction today, but despite the Bank of England’s decisive action, thousands of homeowners across the UK are still yet to feel any relief on their mortgage payments.

“At least two mortgage lenders (West Bromwich Building Society and First Direct) have ruled out passing on the rate cut to their borrowers through a reduction to their standard variable rates (SVRs), with a further five (Halifax, NatWest, Principality, RBS and Scottish Widows) refusing to do so until at least October.”

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