Banking News

BoE cuts cash rate for the first time since 2009

BoE cuts cash rate for the first time since 2009

(4 August 2016 – United Kingdom) The Bank of England (BoE) reduced its base interest rate to a record low of 0.25 percent on Thursday, signalling the first cut since 2009.

However, only two banks, Barclays and Santander UK, had immediately committed to passing on the interest rate reductions to customers. Meanwhile, HSBC, Lloyds Banking Group and Royal Bank of Scotland told reporters that they would evaluate deposit and lending rates offered and inform affected customers of any changes in due course.

"The banks have no excuse not to pass on the cut in Bank Rate and they should write to their customers and make that point," BoE governor Mark Carney told a news conference.

In a move to assist lenders facing additional rate cuts, the central bank’s Monetary Policy Committee (MPC) said it would launch the Term Funding Scheme (TFS) to provide four-year funding for banks at interest rates close to the Bank Rate.

Under the scheme, banks can initially borrow up to five percent of their outstanding lending to UK businesses and households and will be able to access the lowest cost of funding if they maintain or expand net lending to the real economy.

In addition to their initial allowance, they can obtain another pound of funding for every pound their net lending expands between end-June 2016 and end-December 2017.

In contrast, should loan books shrink, banks will face a higher fee and receive no additional allowance. For each one percent that net lending falls, the cost of TFS funding will rise by 0.05 percentage points to a maximum of 0.25 percentage points over the Bank Rate.

Banking industry lobbying group the BBA said Thursday's rate cut and stimulus measures marked the Bank of England's 'whatever it takes' moment for coming to the aid of a UK economy rattled by post-Brexit recession fears.

"The decision to cut interest rates and increase quantitative easing sends a clear signal that the Bank of England is taking a 'whatever it takes' approach to stabilising the economy," Rebecca Harding, BBA's chief economist said.

"Weak post-Brexit data is creating a perception that the economy is likely to slow and the decision to reduce rates has been made on the basis of a perception of risk."

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