The Bank of England has cut UK interest rates following a special meeting held yesterday.
The Bank’s Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25% in response to the coronavirus crisis.
The MPC also voted unanimously for the Bank of England to introduce a new Term Funding scheme with additional incentives for small and medium-sized enterprises (TFSME), financed by the issuance of central bank reserves.
The TFSME is designed to help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses and households benefit from the MPC’s actions and to provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets.
The Bank also believes it will incentivise banks to provide credit to businesses and households to bridge through a period of economic disruption and provide additional incentives for banks to support lending to SMEs that typically bear the brunt of contractions in the supply of credit during periods of heightened risk aversion and economic downturns.
Alex Maddox, capital markets & digital director at Kensington Mortgages, said: “The market was predicting a 0.5% rate cut with a 60% probability so this is not a surprise. It is likely that this is just one of many actions that government and the Bank of England take to provide support to the economy. The budget later today may also contain some announcements.
“For customers with tracker mortgages this rate change will be welcome and reduce their monthly payments very quickly. Fixed rates will not drop as quickly though, as lender’s funding costs may still stay high even after this rate cut.”