Posted by Katherine

Today, the Bank of England announced interest rates have been cut to 1%, which has beat last-month’s record low of 1.5%.

The Bank of England’s Monetary Policy Committee (MPC) cut the official cost of borrowing as it struggles to find a strategy that works on the bleak economy.

Already, interest rates are at the lowest level in the Bank’s 315-year history.

Traditionally, interest rates are cut to make it cheaper to borrow – a move used to encourage spending. At first glance, then, an interest rate cut seems appropriate: the UK has officially entered into recession, unemployment is expected to hit two million  and the UK is expected to suffer the most from the global downturn.

However, there is no evidence to show that a further cut in interest rates will make borrowing cheaper or more accessible – and savers are already suffering from low returns on their money.

In fact, the only people who have benefited from the successive rate cuts are people with tracker or variable-rate mortgages. However, even some of these borrowers do not automatically receive reduced payments in line with the Bank of England rate. For many, their loans have hit the floor and will not drop any further.

And a further cut could put savers in a worse position. The Bank of England has already been urged to leave rates unchanged over fears for savers, who have seen their returns fall by 75% recently.

A further rate cut would also have bad consequences for sterling. Lowering interest rates devalues the currency, meaning that pensioners who live abroad and holiday makers will find it much more expensive than before.

Indeed, it’s difficult to find proponents of an interest rate cut; some economists predict that the Bank will continue to push rates to zero in order to raise the possibility of quantitative easing – creating money to improve liquidity in the banking system.

Whatever the Bank decides to do, it will be a gamble. What would you do in their position?

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