The Bank of England?s Monetary Policy Committee (MPC) has announced a cut in the base rate as part of a package of measures designed to boost growth following the UK?s vote to leave the European Union.
Announcing its decision on Thursday, the Bank of England said that the base rate will be reduced from 0.5% to 0.25% – a record low and the first cut in interest rates since 2009.
The Bank is also introducing a new Term Funding Scheme, which will provide funding for banks at rates close to the new base rate, to encourage them to carry on lending to households and businesses.
It will also purchase ?60bn of UK government bonds and up to ?10bn of corporate bonds.
Discussing the reasons behind these actions, the Bank noted that following the UK?s vote to leave the European Union, the exchange rate has fallen and the outlook for growth in the short to medium term has weakened considerably.
The falling value of the pound is likely to push CPI inflation above its 2% target and unemployment is expected to rise.
The Bank also said that recent surveys of business activity, confidence and optimism suggest that the UK is likely to see ?little growth in GDP in the second half of this year?. However, its forecast for growth in the whole of 2016 has been left unchanged at 2% as a result of stronger than expected growth in the first half, BBC News reported.
Business groups welcomed the Bank of England?s announcement.
CBI chief economist Rain Newton-Smith said: ?The combination of a rate cut and more quantitative easing should be a shot-in-the-arm for business and consumer confidence, lowering borrowing costs and keeping liquidity flowing through the economy.?
Dr Adam Marshall, acting director general of the British Chambers of Commerce (BCC), said that the term funding scheme in particular will help ensure that businesses benefit from cheaper loans, allowing them to invest and grow.
However, he also urged the MPC not to cut the base rate any further, arguing that ?further rate cuts are unlikely to stimulate the real economy significantly, and also bring the threat of negative interest rates on businesses? deposits, which will be of significant concern to some.?