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Bank of England hints at base rate cut if funding scheme fails

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The Bank of England’s monetary policy committee says it might look to cut base rate even further if its Funding for Lending scheme fails to get banks and building societies to increase their lending.

The minutes of the MPC’s July meeting, published last week, show that all nine members voted in favour of keeping base rate at 0.5 per cent at the present time and seven voted to increase the size of the Bank’s quantitative easing programme by £50bn to £375bn. MPC members Spencer Dale and Ben Broadbent voted to keep the stock of asset purchases at £325bn.

The minutes reveal the MPC would consider cutting base rate from a record low 0.5 per cent if its Funding for Lending scheme, which is designed to encourage providers to lend to SMEs and households, fails.

The minutes of last month’s meeting show a further reduction to base rate was discussed but decided against, arguing it could constrain lenders’ ability to lend.

The July minutes say: “The arguments for and against a cut in Bank rate at this meeting were the same as before. But the impact of the FLS and other policy initiatives might, in time, alter the committee’s assessment of the effectiveness of such a rate reduction.

“The committee could review this option again when the impact of the FLS and other policy initiatives are more readily apparent.”

Capital Economics chief UK economist Vicky Redwood says: “The committee said that it would only be able to judge this once the impact of the Funding for Lending scheme had become apparent, which could take several months. A rate cut, therefore, does not look imminent but at the very least, we expect QE to be extended further once the current £50bn of purchases are completed in November.”

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