UK Interest Rate: 0.5%

UK Interest Rates Forecast: Further cuts unlikely

Bank Rate Cut To 0.5% - The Final Cut?

The Bank of England's Monetary Policy Committee yesterday cut the Bank Rate to just 0.5% - the lowest interest rate in the Bank of England's 315-year history.

The cut was made because of the MPC's concerns that inflation would undershoot its 2% target rate. While it might seem strange to be worrying about inflation at the moment, deflation - when prices fall - can be just as troublesome. The MPC's job is to control inflation and its decisions have to be related to this, even though they have other wider effects.

That's Not All - They're Printing Money!

As well as cutting interest rates, the Bank also announced yesterday that they would begin a £75bn asset purchase programme. What this is that the Bank will be creating £75bn of new money and using it to buy investment assets from banks - mostly government bonds and corporate bonds.

The idea is that the price of these bonds will be pushed up by the Bank of England buying so many of them. Interest rates on bonds are related to their price - so rising bond prices mean falling bond interest rates (known as yields). As bonds are a key way for the government and large companies to borrow money, this means that credit should become cheaper.

The government's hope is that all the extra money the Bank of England is creating and spending will find its way into the economy in the form of new bank loans to individuals and businesses, helping boost economic activity.

This process is known as quantitative easing and is a highly unusual and risky step - although most experts agree that there aren't many alternatives left. Remember that this is all an electronic exercise - no new pound notes are actually being printed. The Bank of England will just create the money electronically and then use it to buy bonds.

What Does All This Mean for Mortgage Rates?

Several major mortgage lenders have already indicated that they will pass on yesterday's interest rate cut to their tracker and variable rate mortgage customers - so good news for them.

In the longer term, if quantitative easing is successful then mortgages should become more readily available at reasonable interest rates - although this could take a while.