UK interest rate cut is a boost to businesses

The quarter per cent cut in interest rates announced by the Bank of England’s Monetary Policy Committee (MPC) has brought the UK interest rate to it lowest point in over 30 years.

With the base rate now standing at 5.0 per cent many mortgage rates and borrowing rates are likely to drop as a result. Good news for the consumer and house owner, but on the other hand it will raise inflationary pressure in what many analysts consider to be an overcooking consumer sector.

Business leaders had been seeking a cut in the base rate to help boost flagging exports and perhaps force a drop in what is considered to be an excessively strong pound.

In a statement the MPC said they had “reviewed monetary and economic developments in the context of the projections to be published in the August Inflation Report”.

The MPC said unexpectedly weak world economic activity indicators and the strong pound were placing added pressure on “externally exposed” sectors of the UK economy. In addition the MPC noted signs of weakening investment growth. Set against these factors, retail spending, consumer borrowing and the housing were buoyant.

The MPC concluded: “On balance, the outlook, although highly uncertain, is for aggregate demand and output growth to be weaker than previously projected.

“Although RPIX inflation has picked up in recent months, that partly reflects erratic factors, and underlying price and cost pressures are expected to remain subdued. Monetary policy needs to balance the weaker external environment by sustaining domestic demand growth”.

Consequently the MPC had decided to reduce interest rates by 0.25 per cent to keep inflation on track to meet the 2.5 per cent inflation target in the medium term.

The latest inflation and output projections will appear in a report to be published on Wednesday 8 August.

The Halifax responded quickly to drop the mortgage rate to six per cent. The stock market in response to the surprise base rate cut saw the FTSE jump 70 points to firm higher than expected as trading progressed on Thursday 2 August.

(SP)