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Will the Bank of England cut rates further?

Written by Sam Jones on 18 May 2015.

We have been delighted to see interest rates at rock bottom levels for more than six years giving a major boost to homeowners.

In the teeth of a financial crisis, rates were dropped to 0.5% to introduce a much-needed monetary stimulus.

Those on tracker or standard variable rate mortgage deals saw their monthly costs collapse beyond their wildest dreams.

Rates are set by the Bank of England’s nine-person monetary policy committee which uses rates to reach a 2% inflation target and support growth.

Barring a few dissenting opinions calling for increases in the last six years it has remained firm on keeping rates at the same level.

However, with inflation falling and Sterling appreciating against the euro policymakers are thinking again.

Bank of England governor Mark Carney said he would be “foolish” to cut rates in response to falling inflation which he attributes to falling oil prices beyond his control.

However, he has signalled a rate cut may be required to stop the appreciation of the British currency against the Dollar and Euro.

An appreciating currency is a sign of economic strength as investors rush into the UK. It also makes holiday money cheaper as a Pound becomes worth more and you can get more Euros or Dollars.

However, it makes life more difficult for those British businesses who export goods outside of the UK. For example, a company making Scottish whisky will distil the whisky in Scotland and pay its staff in Pounds but sell it abroad in another currency.

If a customer in France buys a bottle of whisky in Euros then the company must change the money back to Sterling in order to pay its business costs.

If Sterling appreciates then this process becomes more expensive and they lose money, which is why appreciation is bad for exporters.

In a country such as the UK that is defined on exports of manufacturing, financial services and the creative industries this can have a big impact.

How does all this apply to my mortgage? Well, in order to help out exporters struggling with higher costs the Bank of England may cut rates further.

This would cut borrowing costs and help cushion the blow of extra currency costs from a higher valued pound.

Carney has hinted he could make such a move if he feels a higher Sterling could affect UK growth materially.

There are conflicting economic forces at play but it is clear that a rate cut is on the agenda at the MPC rate-setting group.

We see very little talk of rate increases and all the pressure is being applied to possible cuts meaning borrowers could be enjoying further years of low rates.

Ultimately no one knows what will happen over the next six months, 12 months or few years to rates as economic shocks can creep up.

But the indications today are that a rate cut to 0.25% is possible. Indeed, other countries have introduce negative interest rates to boost their economies during certain periods so it is not unprecedented.

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