The cut in interest rates should support the government's plans to increase spending to counter the economic fallout of coronavirus.
Following in the footsteps of other central banks, the Bank of England has announced an emergency interest rate cut, along with several other measures, in a bid to deal with the economic fallout of coronavirus.
The most eye-catching of the measures has been the 50 percentage point cut to interest rates, from 0.75% to 0.25%. The Bank previously cut rates to 0.25% in the aftermath of the 2016 Brexit vote. The move is the first unscheduled rate cut since the 2008 financial crisis.
The Bank 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.”
Commenting ahead of the Budget, Richard Hunter, head of markets at interactive investor, argues that owing to already low rates, the cut by itself could have limited effect. But, he points out: “If this is accompanied by a pledge from governments to add fiscal stimulus into the mix, the combined statement of intent could well underpin market sentiment.”
This coordination with the Treasury was confirmed in the Bank’s statement, alongside confirmation the Bank was acting in concert with its international counterparts, such as the US Federal Reserve and the European Central Bank.
Robin Geffen, a fund manager at Liontrust, speaking before the Budget, emphasised the importance of the rate cut for the government’s fiscal response.
He notes: “With interest rates virtually at zero, this is very helpful in reducing the cost of borrowing to almost nothing given this need for fiscal support and there is a big government spending programme coming up on infrastructure.
“The government can borrow for 30 or 50 years for almost no cost. This is going to be very important with the effect on the economy of both the coronavirus and a possible hard Brexit at the end of the year.”
Alongside the rate cut, several other measures were announced. Perhaps the most important was a new targeted lending facility to aid small businesses, called the Term Funding for Small and Medium Enterprises (TFSME). The Bank also reduced counter cyclical capital buffers for banks to 0%, which is expected to free up more capital for lending.
With coronavirus likely to see a significant fall in demand, alongside other disruptions, businesses are expected to see cashflow and debt servicing problems. Such measures should provide support.
According to Paul Brain, head of fixed income at Newton Investment Management and manager of the BNY Mellon Global Dynamic Bond fund, these policies are more important for supporting economic growth than the rate cut.
He notes: “We would say the moves on the counter-cyclical buffer and term lending for SMEs are more important and more useful than the rate cut. The problem is not so much with the cost of credit as with the flow of credit, and [these] two help with that.”
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