The Bank of England today slashed UK interest rates to just 0.25 per cent in a bid to tackle the fallout of the coronavirus outbreak on the economy.
The 50 basis point (0.5 percentage point) cut takes interest rates lower than the 0.75 per cent they were already at, in a move designed to boost consumer spending.
The 50 basis point cut takes UK interest rates to their lowest level in the Bank’s 325-year history.
The pound gave up gains against the dollar on the Bank’s announcement.
GBP fell sharply from 1.2937 against USD to $1.2865 immediately after the UK interest rate cut. It has since inched up to $1.2911, up 0.20 per cent against the dollar.
UK interest rates now at lowest ever point
The decision follows weeks of economic turmoil as UK coronavirus cases have risen to 382, with six deaths.
Bank of England governor Mark Carney has previously warned of a “large” UK economic shock from coronavirus, though said it would be short-lived.
Today the Bank added there would be an “economic shock that could prove sharp and large, but should be temporary”.
The Bank’s Monetary Policy Committee said:
Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months. Temporary, but significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for short-term credit from households and for working capital from companies. Such issues are likely to be most acute for smaller businesses. This economic shock will affect both demand and supply in the economy
The rate cut managed to push the FTSE 100 up 1.9 per cent in early trading. That followed a day of volatile movements in which the index finished slightly down.
What else is the Bank of England doing?
The interest rate cut was one of a number of measures announced by the Bank to help tackle coronavirus.
The Bank also cut banks’ capital buffer – the amount of cash they must hold in case of a crisis – from one per cent of the amount they have loaned out to zero per cent. The rate had been due to hit two per cent by December 2020.
That follows major high street banks offering fee-free loans to small firms as well as short-term waivers on repayments of some loans.
And the Bank will also seek to help small businesses with a four-year loan scheme they can access over the next 12 months at very close to the new Bank rate of 0.25 per cent.
Rate cut follows Fed Reserve action
The Bank’s decision follows weeks of stock market turmoil as the coronavirus outbreak spread across Europe.
The FTSE 100 has lost billions of pounds from the coronavirus fallout. The index sank to its lowest point since the financial crisis on Monday as oil prices crashed.
And it follows the US Federal Reserve’s move to cut rates by 50 basis points the week before last.
Traders expect more action from central banks as coronavirus disrupts supply chains and dampens consumer spending.
“The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance,” the Bank added.
Firms welcome UK interest rate cut
British Chambers of Commerce director-generalAdam Marshall said the move was positive for firms.
“Businesses will welcome the decisive action taken by the Bank of England to support the economy at this delicate moment,” he said.
“The Bank and UK financial institutions must now work together to ensure that these policy measures translate into real-world support for firms on the ground.
“We will want to see banks using new flexibilities to do everything they can to help businesses whose cash flow and prospects have been disrupted due to the impacts of coronavirus.”
But Ranko Berich, head of market analysis at Monex Europe, said the historic UK interest rates cut, along with a spending Budget, could upend UK economic policy.
“The macroeconomic policy orthodoxy of the past 30 years will likely lie in ruins by the end of today,” he said.
“The timing and size of the move from the Bank of England come as a surprise to markets, and seem calculated to send a clear message of policy synchronisation.”
He added the rate cut marks the era of “active fiscal policy”.
UK interest rate cut ‘small part of stimulus’
Neil Wilson said the rate cut will complement Budget measures to contain coronavirus’ impact on the UK economy.
“Unlike the Fed, which shot its bolt early, this is clearly part of a major coordinated response to the coronavirus pandemic with a twin pronged monetary and fiscal package,” he said.
“It’s a smart decision to… do this on Budget day as it maximises the impact of the cut by tying it to the fiscal package.”
Wilson said rate cuts alone will do little to bolster stock markets battling coronavirus. The Fed’s 0.5 per cent cut over a week ago failed to prevent US stocks plunging.
“But with the term funding scheme measures and counter cyclical buffer being reduced to zero per cent it ought to help the transmission to businesses,” Wilson explained.
“We are seeing the BoE and Treasury clearly leaning on banks to ease conditions for businesses and households – as evidenced by the RBS move yesterday.
“There will be a major support package in the Budget today. The BoE’s cut is just a small portion of the response – it’s not enough to counter the damage alone so we are now looking at a significant stimulus from the government today.”
Budget 2020 to tackle coronavirus
The UK interest rate cut coincides with a raft of measures expected to be announced in the 2020 Budget today.
Those may include a cut in VAT and business relief for small firms to help them through the coronavirus crisis.
A possible VAT cut from 20 per cent to 17.5 per cent could cost the Treasury £17bn, the BBC reported, but could lift consumer spending by encouraging shoppers out to the high street.
This is a breaking news story. More to follow.