Bank of England slashes interest rates amid coronavirus outbreak

By Aaran Fronda

The Bank of England (BoE) has announced an emergency cut to the base interest rate from 0.75 percent to 0.25 percent in a bid to help UK businesses and households weather the economic shock caused by the coronavirus outbreak.

Following the spread of COVID-19, riskier assets and commodity prices have fallen sharply, and government bond yields have reached all-time lows, consistent with a marked deterioration in risk appetite and in the outlooks for UK and global growth, the BoE said.

“Indicators of financial market uncertainty have reached extreme levels,” BoE Governor Mark Carney said in a press conference on Wednesday morning. “Though the magnitude of the economic shock from coronavirus is highly uncertain, activity is likely to weaken materially in the UK over coming months.”

MPC reduces bank rate to support small businesses

The BoE warned that the COVID-19 outbreak will see supply chains temporarily disrupted and weaker economic activity will likely challenge cash flows and increase demand for short-term credit from households as well as working capital solutions for British businesses.

In response, the Monetary Policy Committee (MPC) voted unanimously to reduce the Bank Rate by 50 basis points to 0.25 percent and to introduce a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves.

“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 BoE said.

The BoE said the move would free up £100bn in extra lending power to help banks support small and medium-sized businesses across the UK.

In a statement, the BoE said it was ready to take “all further necessary steps to support the UK economy.”

“These measures will help to keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm,” the BoE added.

BoE cuts rates ahead of budget

The decision by the BoE to cut interest rates came just hours ahead of the UK government’s budget announcement scheduled to take place at 12:30 (GMT) on Wednesday.

UK Chancellor Rushi Sunak will deliver his first budget against the backdrop of coronavirus instability which caused UK equities to suffer their worst day since the 2008 financial crisis on Monday, with the FTSE 100 falling by eight percent.

Speaking ahead of his first budget announcement, Sunak promised voters that “no region will be left behind” in his financial plan for the UK.

“We have listened and will now deliver on our promise to level up the UK, ensuring everyone has the same chances and opportunities in life, wherever they live,” he added.

‘By investing historic amounts in British innovation and world-class infrastructure, we will rebalance opportunities and lay the foundations for a decade of growth for everybody.’

The Office for Budget Responsibility will also unveil its forecasts for the deficit, debt, GDP and productivity on Wednesday, with its assessment offering insight into how Brexit will impact the UK economy.

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