Last week UK interest rates felt the first cut since 2009, undergoing a transition from 0.5% to 0.25%. The decision was approved by all nine members of the Monetary Policy Committee (MPC).
This record low Bank rate (the interest charged when the central bank lends to the commercial bank) should reduce payments on loans and encourage households and businesses to spend more. Mark Carney, the governor of the Bank of England has said that banks have “no excuse not to pass on the lower borrowing costs to customers and will be charged a penalty if they fail to do so”.
The news of these cuts should not only provide some encouragement to aspiring entrepreneurs and small businesses to borrow more loans, invest and expand, but also mark a period of higher consumer spending.
Take, for example, the impact on mortgage repayments. A mortgage is by far the biggest debt taken on by the vast majority of households in the UK. Roughly 11.1 million households have one. Due to interest rates cuts, the average monthly mortgage bill is reduced, freeing up some extra cash for those households to spend on goods and services. According to the Office for National Statistics house price data, a cut to 0.25% means a £22 monthly reduction in the bill for the averaged priced home of £211,000 (if they are on a variable 25-year repayment mortgage).
Add to this factors such as easier access to cheap credit, it’s likely that consumer spending will increase in the coming months. Making this a great time to test out new products, expand store holdings and push some advertising.
The Bank of England has also signalled that the rates may go lower to deal with the economic damages resulting from Brexit. In fact, according to the Bank of England’s deputy governor Ben Broadbent, there is a real prospect of a further cut in the rates before the end of this year. Reports have stated that a majority of the MPC backed another cut.