UK’s first interest rate change in seven years

The Bank of England cut UK interest rates for the first time since March 2009 today.

Mark Carney announced a reduction from 0.5% to 0.25% at noon, with 50 of 52 economists polled by Bloomberg predicting it. Many anticipated a cut last month in response to grim economic data, but the Monetary Policy Committee (MPC) left rates unchanged.

It is hoped a rate cut will provide stimulus to the UK economy following the Brexit vote, and the ensuing prospect of a recession in the latter half of this year. Alan Wilde, head of global fixed income at Baring Asset Management, speaking ahead of today’s announcement, said which additional forms of easing the bank will adopt, if any, are less clear-cut.

“Options range from restarting quantitative easing, to providing more direct help to borrowers via the Funding for Lending Scheme, or a new variation. Some commentators even expect all three measures to be announced today, but such a strong commitment at this stage seems unlikely,” he said.

He went on to note that markets may be anticipating too much in the way of immediate easing, given the MPC might wish to leave some options open for a later date, should circumstances demand they act again.

While most economists believe stimulus measures to be vital and sensible at this stage, others are less convinced of their efficacy. Andrew Sentance, former MPC member and current senior economic adviser at PwC, strongly opposes both a rate cut and a resumption of QE.

“Financial markets were in such a fragile state when QE was introduced in 2009, they aren't in that position now – we don't have the same level of turbulence, so there is a chance of making things worse,” he said.

While the pound has slipped and UK equities indices are underperforming their continental counterparts in the run-up to the announcement, Wilde suggested markets may respond positively to a rate cut, with sterling strengthening due to a bias of short sterling positions, although UK gilts could weaken as they have performed better than other global bonds in anticipation of easing measures.

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