What will happen if the Bank of England cuts interest rate to an historic low?

The Bank of England is widely expected to cut interest rates to a new historic low when it meets on Thursday (4 August), after wrong-footing markets last month when it surprisingly opted to sit tight. Threadneedle Street officials have left interest rates unchanged since March 2009 but Britain's vote in favour of leaving the European Union has forced them to change their approach.

The BoE's position post-Brexit vote is in sharp contrast with its stance between October and December 2015, when Britain's central bank and the US Federal Reserve were the only two central banks in the world expected to raise interest rates.

We have gone through the possible scenarios to explain what implications would a rate cut have on the British economy.

1) What does a rate cut mean for the pound?

Should the Bank of England opt to cut rates by 25 basis points - from 0.50% to 0.25% - as forecast, we can expect the pound to weaken almost immediately. Sterling surged in July, when the BoE surprised investors by leaving interest rates unchanged, but if the expected cut does materialise, the pound is likely to suffer losses.

Furthermore, cutting interest rates would bring the BoE's benchmark rate below the Fed's - which lifted it from 0-0.25% to 0.25-0.5% in December - for the first time since 2007 and for only the second time since the early 1980s.

When the same scenario occurred for 27 months between November 1980 and September 1984, the pound lost 49% against the dollar.

2) What does a rate cut mean for savers?

Cutting interest rates will deal a significant blow to the pound, but savers will not have much to be cheerful about either. Best-buy savings accounts are quickly disappearing from the market - 13 of them were withdrawn from the market last month and have not been replaced - ahead of Thursday's decision.

"Savers' hopes have been continually dashed, and this week could prove to be the final nail in the coffin," said Ben Brettell, senior economist at Hargreaves Lansdown.

"I believe interest rates easily could stay where they are for five to ten years – and a return to 'normal' pre-crisis levels is impossible to foresee over any reasonable timeframe."

3) Has this happened before?

In short, no. The BoE has kept interest rates at a historic low for the last seven years and the expected cut would bring the benchmark into uncharted territory. When Britain's central bank cut the benchmark to 0.5% in 2009, the lowest since the BoE was founded in 1694, it described the figure as an "emergency rate" and for the past seven years savers, institutions, fund managers and economists have believed a rate rise was just around the corner.

The bank has, however, implemented stimulus packages before, spending £150bn on assets purchase in 2009.

4) Could interest rates being cut to zero?

It is extremely unlikely the BoE will move its policy rates to or even below zero, which is traditionally seen as the lower bound for nominal interest rates, for the foreseeable future. Cutting rates to zero is generally seen as a last-ditch attempt to rescue a flagging economy but Britain's is not at that stage and it is worth remembering the BoE has only been forced into action by economic slowdown brought upon by the Brexit vote.

However, implementing such a drastic policy is not entirely uncommon. Over the last couple of years, a number of central banks, including Danmarks Nationalbank, the European Central Bank, Sveriges Riksbank, the Swiss National Bank and most recently the Bank of Japan have all cut rates to or below zero.

5) Is this a sign central banks are running out of ammunition?

Many economists argue that central banks are running out of options to lift fragile economies after the 2007 crisis, even by the unconventional means they have adopted so far. Some say it is time to take up more radical measures, such as helicopter money, which consists of a bank printing money and dropping in onto citizens in order to kick-start the economy.

Advocates of this measure say this is a highly effective way of putting "free" money into the hands of ordinary people who will be inclined to spend it, rather than pay off debts.

However, critics claim the move could lead to rampant inflation as a mountain of ready cash leads to a surge in the price of available goods and services. Britain's inflation stood at 0.5% in May, way lower than the BoE's 2% target and economists expect the bank to slash its growth forecast for the UK economy to below 1% compared with the 2.3% it predicted in its inflation report in May.