Bank of England governor Mark Carney has gone above and beyond market expectations with a massive stimulus package and taken an axe to interest rates.
The Bank’s monetary policy committed (MPC) voted unanimously to lower interest rates to 0.25 per cent and extended its quantitative easing programme that will add £170bn of cash into the economy, warning growth in the UK economy will grind to a halt over the next 18 months and another cut could be on the cards before the end of the year.
— Bank of England (@bankofengland) August 4, 2016
Here's how the market reacted to the news
FTSE 100 investors – who were all but certain of an interest rate cut – cheered the fresh injection of cheap cash into the economy and sent the market up by 1.5 per cent to 6,732.76 points.
A falling pound helped the blue-chip index (which makes most of its money abroad and benefits from a weaker pound).
The pound dropped 1.12 per cent against the dollar at $1.3172 and was down almost one per cent against the euro at €1.1835 before leveling out.
The UK's benchmark bond – the 10-year gilt – yield fell to 0.68 per cent, from 0.80 per cent before the Bank's announcement. Yields fall as prices rise.
The 30-year gilt fell below 1.5 per cent for the first time in history following the announcement.
Russ Mould, investment director at AJ Bell, said:
Markets have been pricing in a loosening of monetary policy ever since the Brexit vote so today’s move by the Bank of England is likely to be welcomed by equity investors but is bad news for people with cash savings.
A weak pound is already giving exporters and big overseas earners like the miners, oil, pharmaceutical, aerospace & defence, consumer staples stocks a lift and they are likely gainers following today’s monetary policy easing.
The pan-European STOXX 600 index was up by over one per cent a little earlier, extending earlier gains after the Bank moved.
Winners and losers
Following the announcement most stocks have either added to earlier gains or partially erased the day's losses. While markets were expecting the cut to interest rates, the injection of cash means companies will have access to
House builders reacted well to the news. Berkeley Group and Taylor Wimpey are both up by around three per cent and were sent higher by the news.
Oil majors also climbed following the announcement. Royal Dutch Shell is up by 3.5 per cent, while BP erased its earlier loses and is now trading 0.4 per cent higher.
Savers are expected to be badly hit by the further cut to interest rates. UK savers have a total of £1.25 trillion in savings which generates a paltry £10.6 billion a year in interest, but this increase is more than offset by the £18.8 billion in value lost to inflation.
Research from financial advisors Salisbury House shows UK savers will lose £8.1bn to inflation due to a cocktail of zero and near-zero interest rates on cash accounts, savings accounts and ISAs– even before today's change to interest rates.
Tim Holmes, managing director of Salisbury House said:
The interest rate cut is yet another blow to UK savers. In a zero-rate environment UK savers are seeing the value of their savings eaten up by inflation.
Savers are losing billions in value each year and the interest rate cut will only make the situation worse. Savers need to seek out higher yielding investments just to maintain their current level of wealth.