Coronavirus: Bank of England cuts base rate to 0.25%

by Brean Horne from Moneywise |

The Bank of England announces a package of measures to help the economy amid coronavirus concerns

The Bank of England (BoE) has cut the UK base rate from 0.75% to 0.25%, the lowest level in history.

It forms part of an emergency package of measures to protect the economy amid the coronavirus crisis.

In its special meeting ending on 10 March, the Monetary Policy Committee (MPC) voted unanimously to reduce the base rate.

The change follows action taken by the US Federal Reserve, which cut its core interest rate to 1%, down from 1.25% last week.

The MPC also voted to introduce additional support for small and medium sized enterprises (SMEs).

The BoE will provide a four-year loan scheme for SMEs over the next 12 months.

It will also offer about £190 billion in additional funding to SMEs that face severe disruption due to the coronavirus outbreak.

The BoE's Financial Policy Committee (FPC), which identifies and acts on potential risks in the financial system, has also lowered the counter-cyclical capital buffer for banks from 1% to zero.

This enables banks to boost lending, as they are required to hold less money in reserve. 

In a statement the BoE stated that the impact of coronavirus on the UK economy could pose severe disruption in the months ahead. 

"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 Bank said. 

Giles Coghlan, chief currency analyst at HYCM, says: "Much can be said about the timing of this cut. It comes not only amidst one of the biggest public health crisis in recent memory, but on the day Boris Johnson’s government will deliver its first highly anticipated budget.

“Like the US, the hope is to bring some immediate relief to businesses and also encourage a spike in new investment activity. It looks to be another eventful few days of trading. 

"This is expected to be a temporary cut with interest rates being increased when the coronavirus outbreak is behind us.

"It will be interesting to see how the combination of fiscal stimulus from the Government and monetary stimulus from the Bank of England will impact the GBP today."

 

This article was originally published in our sister magazine Moneywise. Click here to subscribe.

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