The Bank of England has voted to cut interest rates to their lowest ever level as part of a ‘comprehensive’ package of measures to mitigate the ‘sharp and large’ economic impact of coronavirus.
The bank’s Monetary Policy Committee (MPC) voted unanimously to reduce the rate by 50 basis points to a historic low of 0.25%.
The body will also use central bank reserves to implement new incentives for SMEs, and maintain both corporate and government bond purchases.
The MPC said: “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.”
Coronavirus has continued to spread across both the UK and the world, knocking billions off share prices and sending business confidence plummeting back to pre-Brexit and pre-election levels.
Latest figures show six people have died in the UK and 382 cases have been identified – including Health Minister Nadine Dorries, who last night became the first MP to confirm contraction of the virus.
Chancellor Rishi Sunak is expected to reveal a further range of short-term measures to help UK businesses ride out the virus impact in his Budget later today.
The Bank of England said: “Although the disruption arising from Covid-19 could be sharp and large, it should be temporary.
“Such economic disruption should have less of an impact on the core banking system than recent stress tests run by the bank have shown the system can withstand.
“Those stress tests demonstrated that banks would be able to continue to lend to businesses and households even while absorbing the effects of substantial, prolonged economic downturns in both the UK and global economies, as well as falls in asset prices much larger than experienced in recent weeks.”
The bank said it has operations in place to ensure loans are available to banks on a weekly basis, and says £300bn is available to borrow on this basis.
It added: “Major UK banks are well able to withstand severe market disruption. They hold £1trn of high-quality liquid assets, enabling to meet their maturing obligations for many months.”
The business community has offered immediate approval of the bank’s actions.
Tej Parikh, Chief Economist at the Institute of Directors, said: “The bank’s swift action to shore up confidence and support lending will come as a significant relief to business leaders.
“A rate cut will help to support confidence in the markets, which has taken a severe knock over the past few days. For businesses, the wider package of lending support could be just as crucial in the medium term, to help firms ride out the anticipated difficulties.
“Directors will now be looking to the Chancellor to match this support with fiscal measures to lower costs and coax business investment in the months ahead.”
Federation of Small Business (FSB) National Chairman Mike Cherry agrees the move is a positive and says it could prove a ‘lifeline’ for some firms during a time of financial crisis.
He said: “The Bank of England has thankfully wasted no time in taking action to try and stabilise the UK economy in the wake of the Coronavirus outbreak.
“Four in ten small firms say new credit is unaffordable, so it’s encouraging to see measures – including a rate cut – aimed at making loans less expensive at such a challenging time.
“Equally the £100bn cash injection into banks earmarked for small business lending will hopefully throw a lifeline to firms suffering from cashflow issues.
“More than a third of small firms that secure new finance use it to manage cashflow, so it’s absolutely critical that this new funding makes its way to small firms in need as swiftly as possible. We can’t have hold-ups at the banks.
“Small firms need all the help they can get at this difficult and uncertain time and they will be hoping that the prompt use of monetary policy levers eases cashflow concerns, particularly for businesses heavily dependent on high footfall.”
Academics too support the move.
Dr Ivan Petrella is Associate Professor at Warwick Business School and an expert in economic policy. He said: “This is a timely move by the Bank of England, taking a number of preemptive measures aimed at supporting the economy in the face of the Covid-19 epidemic.
“This includes a 50bp cut to interest rates, but more importantly, a new Term Funding Scheme with additional incentives for small businesses and countercyclical capital buffer. These actions provide liquidity and much-needed support for SMEs, which are most vulnerable to the Covid-19 shock.
“The timing, ahead of the measures expected in the 2020 Budget, gives a clear indication that UK policymakers are ready to make a coordinated effort to support the economy.
“The fact that fiscal and monetary policy will be singing the same tunes will certainly be welcomed by the markets.”
However, Celine Hartmanshenn, Global Head of Risk at Stenn Group, an international provider of trade finance headquartered in the UK, warned these measures are ‘a mistake’ which will not help firms which have already been struggling due to other economic pressures.
She said: “The Bank of England has wasted no time cutting rates to near rock bottom levels. But while it may bring some benefit to consumers and heavily indebted companies, lowering interest rates is unlikely to help prevent the economic wrath of the coronavirus.
“We saw this already in the trade war. Lowering rates helps the stock markets, which will become more relaxed now, but the real economy isn’t the stock market.
“It’s likely that indebted companies, those in need of financial support, will be unable to access further loans from banks, as they’ll be looking at ratios of balance sheets, and there is an end of the line which was reached way prior to the trade war. These companies will now need to look to private lenders and alternative finance providers instead.
“Cheaper money also won’t have much effect in a supply shock. Manufacturing is where we will see one of the biggest crunches, and will cause the economy to dip. The volume of goods being produced is lowering, as factories in China, usually in a dominant manufacturing position, are operating at about 50% of the workforce.
“This will have a ripple effect around the world, not just in the UK but emerging markets who rely on China for goods.
“The ECB is due to report tomorrow and we’re expecting a reduced rate also, but it’s a mistake for central banks to use Coronavirus as an excuse to lower interest rates. It would be more effective for governments to introduce temporary tax breaks, new loan programs, or other financing to companies hurt by the virus.
“This is all about raising stock prices and lowering borrowing costs. The measures put forward by the world’s bankers can’t keep workers from getting sick or factories from closing.”