Interest rates fall, but so does the pound
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Those thinking of seeking a loan in the near future should take note. Expectations of another interest rate cut have risen after the release of minutes from the Bank of England meeting at which rates were lowered from 4.5% to 3%.
The Bank’s nine-member committee voted unanimously for the cut on 6 November, but considered a bigger one.
The Bank’s own calculations showed that a cut to 2.5%, or even lower, would be needed to stop inflation falling too far below its target next year. But the rate-setters decided such a big cut would come as too much of a shock.
The one-and-a-half percentage point cut they agreed on was the biggest reduction since 1981, and took rates to the lowest level since 1955.
Commentators believe that this confirms that we’re going to see more rate cuts from the Bank of England, and more aggressive rate cuts.
The minutes said that: “Some members thought there was an argument for leaving some of the required policy loosening to the months ahead to support confidence as the economy weakened.”
There was also concern that if rates had been cut by any more, there could be too sharp a fall in the value of the pound, which would create inflationary problems.
In recent weeks the pound has fallen below $1.50 for the first time since 2002. The pound is also at its weakest level against the euro since the currency was created in 1999. Only twice in recent history has sterling fallen by such a degree. On 16 September 1992, the pound was withdrawn from the European Exchange Rate Mechanism, triggering a fall from around $2 to $1.40.
In addition, the committee’s members were worried that a bigger cut could be “misinterpreted” and that this could damage its credibility.
The Bank stressed that its decision was based on the government’s current tax and spending plans, which meant they would have to be reconsidered after the chancellor’s pre-Budget report, which will be published on Monday.
For those able to find a loan this will be good news, the interest rate falls will be passed on and you will repay less. In the current climate, however, this will be cold comfort to those who are unable to find a lender.
