The Bank of England base rate has been slashed to 0.1% in an emergency move designed to counter the economic impact of the coronavirus.
The Monetary Policy Committee voted unanimously today to cut the base rate from 0.25% to 0.1%. This is the second emergency move related to the coronavirus pandemic, following last week’s decision to cut rates from 0.75% to 0.25%.
The Bank said these decisions were taken to help UK businesses and households through the economic disruption.
Prior to these cuts, which are the first unscheduled interest rates votes since the financial crisis, interest rates had stayed the same since August 2018.
Changes to interest rates can have far-reaching consequences on everything from your personal finances to the wider economy.
The Bank of England sets interest rates, also known as the base rate, in response to current events and expected economic performance, with the aim of keeping inflation around its 2% target.
In the past, holding rates had been described as a ‘wait-and-see’ approach to Brexit. But now that coronavirus is beginning to affect the global economy, the future of interest rates during the Brexit transition period and beyond is increasingly complex.
So what could happen next, and what will interest rate decisions mean for you?
Why the Bank of England base rate matters
Sometimes known simply as the interest rate, the Bank of England base rate influences how much banks and other lenders charge you to borrow money, and how much interest is paid on your savings.
In the case of a base rate rise, banks will tend to raise mortgage interest rates as well as loans, pushing up the cost of borrowing money. At the same time, interest rates on savings are also likely to increase, meaning your savings pot could grow a little faster.
Lowering the base rate could have the opposite effect, with mortgage rates becoming slightly cheaper, but savings deals offering lower returns.
After August’s growth figures revealed the UK economy shrank by 0.2% – the first contraction since 2012 – many in the City called for a rates cut to increase spending and stimulate growth. The MPC did not bow to this pressure, and the base rate was kept the same until March.
- Find out more: the Bank of England base rate and your mortgage
Factors that influence the base rate
When setting interest rates, the MPC’s goal is to keep inflation as close to 2% as possible. Its decisions are informed by an inflation forecast, which takes into account:
- the current inflation level
- wage growth
- the cost of goods (including the impact of changes in the exchange rate)
- consumer spending
- investment levels
Interest rate decisions also consider unemployment rates and economic growth figures – the latter of which must not exceed a 1.5% ‘speed limit’ or inflation could rise above target.
The Bank of England puts it like this: ‘Overall, we know that if we lower interest rates, this tends to increase spending and if we raise rates this tends to reduce spending. So, to meet our inflation target, we need to judge how much people intend to save and spend given the current interest rates.’
Timeline: interest rates since the Brexit referendum
As Brexit looms on the horizon, you might wonder how this unprecedented political event might affect the economy. While no one has a crystal ball, it can be helpful to look at what’s happened to the base rate over the past two years of Brexit votes and negotiations.
March 2020: the Bank of England cut the base rate from 0.75% back down to the previous record low of 0.25%.
It said the decision was taken to help households and businesses get through the economic slowdown caused by the coronavirus.
This was the first unscheduled base rate vote since the financial crisis.
August 2016: Just over a month after the referendum on EU membership, the Bank of England cut the base rate in half – from 0.5% to 0.25%. This was the first time the interest rate had changed since March 2009.
Interest rates were already at a historic low before this reduction. In the wake of the 2008 financial crisis, the base rate fell dramatically from 5% to 0.5%, where it remained for almost a decade.
November 2017: the MPC restored the base rate to pre-referendum levels in order to combat rising inflation. The Bank linked this decision directly to Brexit, saying ‘the fall in the pound following the Brexit vote’ means that things from abroad cost more, ‘and that means higher prices in the shops’.
August 2018: The MPC raised interest rates from 0.5% to 0.75% – the first rise above 0.5% in almost a decade. This decision was based on the economy’s steady growth, and the accompanying report noted that most referendum-related price hikes appeared to have happened already.
March 2019: Just over a week before the UK’s original EU exit date of Friday 29 March, the MPC voted to keep interest rates at 0.75% once again, citing low unemployment and inflation almost exactly on target at 1.9%. Minutes from the group’s meeting did, however, discuss the negative effect Brexit could have on businesses.
January 2020: The MPC kept interest rates at 0.75%, with seven of nine members voting this way. The remaining two voted to cut the base rate to 0.5%, but they were overruled by the majority. This could be the first sign that a rates cut is on the way. Though there’s no guaranteeing that this is the case.
March 2020: The MPC cut base rate twice this month – once to 0.25% and once to 0.1%. The announcements made no reference to Brexit. Instead, economic fallout from the coronavirus pandemic was the motivation.
What can you do to prepare?
When the base rate does change, the key things that could be affected are your mortgage and your savings.
For savings, a base rate rise could see your account’s interest rate increase, giving you better returns. On the other hand, if the base rate is cut, you might see your interest fall.
Switching to a fixed-rate account will secure you against any potential Brexit turmoil, but you’ll miss out on the possible benefits of a base rate rise.
If you’re thinking of switching, you can compare hundreds of savings accounts at Which? Money Compare to find the best home for your nest egg.
Variable-rate and tracker mortgage customers could face higher repayments if the base rate rises. If you’re worried about this, you could remortgage to a fixed-rate deal in order to secure cheaper repayments for a set period.
However, if the base rate is lower, variable rate borrowers may see their repayments become cheaper. You’ll miss out on this if you’re on a fixed rate.
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Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms & conditions of a provider before committing to any financial products.