Bank of England base rate kept at 0.5% amid 'Brexit' uncertainty
The Bank of England’s Monetary Policy Committee (MPC) has unanimously voted to keep the Bank’s base rate at 0.5%, amid economic uncertainty surrounding the forthcoming referendum on the UK’s membership of the European Union.
Base rate has now stood unchanged at 0.5% for a whopping 85 months in a row - it first fell from 1% in March 2009.
The MPC says it judged it “appropriate to leave the stance of monetary policy unchanged”, as the effects of the referendum are “likely to make macroeconomic and financial market indicators harder to interpret” and it’s therefore “likely to react more cautiously to data news over this period than would normally be the case”.
Maike Currie, investment director for personal investing at Fidelity International, says holding the base rate at 0.5% comes as no surprise. “With the IMF downgrading its UK growth forecast, uncertainty over the UK’s fate in the European Union, low inflation and stuttering growth, this comes as no big surprise”, she comments.
However, the MPC continues to warn that base rate will need to rise eventually to ensure inflation returns to its target.
The consumer prices index (CPI) rose to 0.5% in March, but it still remains well below the Bank’s the 2% inflation target.
Andrew Wilson, head of investments at Towry, says: “The Bank of England won’t want to act until after the EU Referendum, and how it acts will completely depend on the result.”
While Ben Brettell, senior economist at Hargreaves Lansdown adds: “Continuing weak inflation - despite Tuesday’s bigger-than-expected jump to 0.5% - puts no pressure on the MPC to raise rates. Furthermore there are growing concerns that the economy is stuttering.”
The MPC says it expects any base rate rise to happen “more gradually and to a lower level then in previous cycles”.
Good news for mortgage borrowers, but bad news for savers
The news that base rate will be kept at 0.5% will be welcomed by mortgage borrowers whose deals are tied to the base rate.
But Calum Bennie, savings expert at Scottish Friendly, says it’s “grim news” for cash savers, with savings deals continuing to be pulled and rates slashed.
He recommends savers consider investments to beat poor paying interest accounts. “Stocks and shares Isas offer the opportunity to grow money over the long-term, and although risk is attached, savers need to have these products on their radar in order to be able to gain from the returns they can offer.”
Ms Currie supports this view, adding: “If you’re unsure about the benefits of investing in the stock market over hoarding cash, our calculations show that if you had invested £15,000 into the FTSE 250 index 10 years ago you would now be left with £33,925.
“If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with a paltry £16,036. That’s a difference of £17,889 – far too big for anyone to ignore.”
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.