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Bank Base Rate Cut to Record Low, and More QE

The Bank of England has cut base rate to 0.25% today, from 0.5%, following a recommendation by the Monetary Policy Committee. In addition there will be more Quantitative Easing (QE) including the purchase of both Government debt and corporate bonds. These measures are aimed at avoiding a recession that Mark Carney otherwise believes is likely.

The new interest rate is yet again a new historic low in UK interest rates, and of course bodes ill for savers even if it may keep the mortgage market afloat. Indeed interest rates paid by banks are now so low that it is difficult to see how they can go much lower. RBS has already threatened to charge negative interest on company cash balances, i.e. they will have to pay RBS to hold their money. We are likely to see even more banks looking to pay zero or negative interest and increase charges by other means.

The announcement has had a positive impact already on the stock market though even though it was widely anticipated in the media. The FTSE-100 is up 1.5% at the time of writing.

What’s the implication for stock market investors? It just means that asset prices will continue to be inflated, as it becomes ever cheaper to borrow money. That includes property prices also, including housing, of course. How long we can live in this abnormal world though is anyone’s guess.

Roger Lawson

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