As expected, the Bank of England (BoE) Monetary Policy Committee (MPC) voted unanimously today to cut interest rates to 0.25%, in a move to beat Brexit blow.
In addition, the BoE extended its quantitative easing programme by £60bn, launched a £10bn corporate bond purchase scheme and pulled the trigger on credit easing, with a new funding scheme for banks.
Hetal Mehta, senior European economist at Legal & General Investment Management, said the overall package is broad-based – almost a ‘kitchen sink’ approach – and should mitigate the negative impact on banks from ultra-low interest rates.
“Today’s interest rate cut was […] widely anticipated, although the package of additional measures to support the economy is more significant in scope than what markets had priced in. In response, both gilt yields and sterling have fallen, while equity markets have moved higher,” Mehta said.
Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers, pointed out: “As interest rates remain low, investors are still going to be grappling in their challenge to search for yield and as the bond market liquidity situation deteriorates further alongside growing central bank dominance.”
Ahmed recommends investors to “be careful in this environment and strongly consider a low portfolio turnover approach, by focusing on quality to enhance portfolio construction, while continuing the search for yield in areas such as emerging market debt and emerging market equities”.
Jeremy Roberts, head of UK Retail Sales at BlackRock, said the period of record low interest rates is set to remain after the BoE rate cut decision and this means increasing pressure on savers who have assets in cash.
“According to our Investor Pulse survey, the average Brit continues to hold more than two-thirds of their money in cash, in spite of painfully low interest rates. In order for savers to realise a brighter future in retirement, this must change,” Roberts said.
“The 4000 people we surveyed in the UK told us that, on average, they would like an annual income of £23,000 in retirement. The bad news is that this level of income is going to be harder to achieve with the amount of cash that people have sitting in the bank. Now, more than ever, people need to put their hard-earned cash to work so that they can get on track to meet their retirement goals.”
While the fund industry might find new clients on the back of this pressure on savers holding assets in cash, borrowers will benefit from the BoE decision to reduce the base rate by 0.25% to 0.25%.
“The rate reduction is good news for borrowers. Those on tracker rate mortgages should see their rate reduced by 0.25%. For someone with a £300,000 mortgage, this will save them approximately £62 in interest a month,” said Joshua Gerstler, financial adviser and chartered accountant at The Orchard Practice.
However, there is a danger that some lenders will use the terms of their contracts to say that borrowers are pegged to their own base rates and not the BoE base rate and therefore not pass on the rate reduction to borrowers, Gerstler said.
“I do not envisage any of the big lenders doing this but they have put that clause into their contracts to give themselves the option of doing so, so we will have to wait and see,” he said.