Mark Carney, the governor of the Bank of England (BoE), has made it clear that it will consider all policy options to boost the economy. This has led to speculation that it could cut its base rate – from 0.5% to 0.25% – in August. It’s even been suggested that we could see a second rate cut – and a base rate of 0% – by the end of the year.
The pressure to cut rates comes from slowing economic activity. In times of uncertainty, the government needs to promote lending to keep business going, and a super-low base rate means banks can charge borrowers and hit savers, and may make mortgage deals cheaper.
However, when it sets the base rate, the BoE has to balance the risk of inflation against the threat of an economic downturn. While inflation is low at present, a falling pound means that the price of imported goods (notably food and fuel) is likely to rise. If inflation starts to rise, the BoE could hike the base rate to nip it in the bud.