The Bank of England. Picture: BLOOMBERG
The Bank of England. Picture: BLOOMBERG

The Bank of England (BOE) has cut interest rates in an emergency move and announced measures to help keep credit flowing through the economy, saying the coronavirus outbreak will damage economic activity. UK stocks jumped

Governor Mark Carney and fellow policymakers voted unanimously to cut interest rates 50 basis points to 0.25%, and introduced a new scheme to ensure companies can easily and cheaply access credit. That is seen as a crucial crisis response if businesses are forced to shut because of the virus outbreak, which will hit cash flow and make it harder to cover bills, wages and other costs.

It also cut a special capital buffer to give banks even more room to lend.

The decision comes a week after the US Federal Reserve (Fed) slashed its main rate and just hours before the UK government announces spending measures in its budget. The European Central Bank (ECB), which holds its policy meeting tomorrow, is expected to join the growing wave of crisis easing with its own measures.

What investors may like is the BOE is delivering a large rate cut like the Fed, yet is also targeting aid to those businesses who may suffer an economic backlash from the virus. The response signals co-ordination between the central bank and the government which may again please markets and serve as a model for policy in other economies.

The FTSE 100 index climbed 1.6%, while the pound initially dropped as much as 1.3% against the euro to the weakest level since October, before paring almost all of its losses.

“The only slight surprise is that there is no forward guidance about the next policy move,” said Allan Monks, an economist at JPMorgan in London, who predicted the rate cut and measures to support bank lending. Monks argues officials are probably still prepared to lower borrowing costs again at its scheduled meeting on March 26 if the situation worsens. “And although not currently our call, the next step for the BOE beyond then is quantitative easing if required.”

Wednesday’s decision comes in the last week of Carney’s tenure at the BOE. The Canadian will leave the bank on March 15 and be replaced by Andrew Bailey.

“Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the UK over the coming months,” the BOE said in its early morning statement.

The new term funding scheme will include special incentives for smaller firms, and it will be financed by the issuance of central-bank reserves. The BOE also cut the countercyclical capital buffer to 0%. That’s a reserve held by banks, and the reduction should free up cash for them to lend.

Bloomberg

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