The Bank of England has revealed another base rate cut, with the official rate of interest reduced to a new low of just 0.5%.
It has also been given the green light by the Treasury to use quantitative easing, or creating more money. In a statement, the Bank of England said that the low base rate by itself still leaves a "substantial risk" of the UK entering a period of deflation.
It has therefore decided use quantitative easing, with the aim of boosting the supply of money to banks, lowering the cost of borrowing and raising the rate of spending. The central bank will, therefore, pump £75 billion into the markets.
The cut was largely anticipated by economists. The central bank’s Monetary Policy Committee (MPC) has cut the base rate for six consecutive months, falling from 5% in October to just half a percentage point in March. The minutes from its February meeting made it clear that the MPC believes lower interest rates are essential for economic recovery.
Rate cuts are designed to help lower the cost of borrowing for both households and business. However, the effectiveness of this monetary policy is under doubt; apart from concerns that only tracker mortgage borrowers are benefiting from rate cuts, and warnings that prudent savers are being the most severely punished, the economy continues to contract and the recession shows no sign of abating.
Adrian Coles, director general of the Building Society Association, says lower savings rates will reduce the inflow of money people put in institutions – as a result, banks and building societies will be forced to further cut back their lending operations.
"The rate cut is a kick in the teeth for savers who will see their already diminished interest payments fall even further," he says. “It will also harm the aspirations of the many people who are finding it difficult to get a mortgage, particularly first-time buyers with relatively small deposits. Lower interest rates reduce the incentive to save, and in turn, this limits the flow of funds into the mortgage market."
According to uSwitch.com, the latest base rate cut will bring the average savings rate down to just 0.58% - offering a miserly return of £16.32 a year on the average savings balance of £2,813.
Coles adds: “We do, however, welcome the central bank's announcement to implement quantitative easing and we share the government’s hope that this will increase the flow of money in the economy and lessen the severity of the downturn.”