We live in interesting times

The Bank of England’s Monetary Policy Committee voted on 4 August to reduce their base rate to 0.25%.

This is good news for individuals and businesses about to borrow money, as it should mean that the interest rate applied will be lower.

Certainly, the interest rates charged by HMRC for late payment of taxes are linked to the base rate and will be cut accordingly. These reductions will apply from 15 August 2016 for quarterly instalment payments, and from 23 August 2016 for non-quarterly instalment payments.

The rate reduction is being made in tandem with a package of measures to provide additional monetary stimulus. As part of their published reasoning for their actions the Bank of England have said:

“The cut in Bank Rate will lower borrowing costs for households and businesses.  However, as interest rates are close to zero, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn might limit their ability to cut their lending rates.  In order to mitigate this, the MPC is launching a Term Funding Scheme (TFS) that will provide funding for banks at interest rates close to Bank Rate.  This monetary policy action should help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that households and firms benefit from the MPC’s actions.  In addition, the TFS provides participants with a cost effective source of funding to support additional lending to the real economy, providing insurance against the risk that conditions tighten in bank funding markets. 

 

The expansion of the Bank of England’s asset purchase programme for UK government bonds will impart monetary stimulus by lowering the yields on securities that are used to determine the cost of borrowing for households and businesses.  It is also likely to trigger portfolio rebalancing into riskier assets by current holders of government bonds, further enhancing the supply of credit to the broader economy.”

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