Bank of England cuts interest rates to ‘cushion effect of coronavirus’ on UK economy

Bank of England’s surprise cash rate cut is a bid to ‘cushion the UK economy from the impact of the coronavirus’.

A man wearing a face mask walks backdropped by a red London bus across the street from the Bank of England in London. Picture: AP

The Bank of England cut its benchmark interest rate in an unexpected move aimed at cushioning the UK economy from the impact of the coronavirus.

At an emergency meeting of its policy committees on Tuesday, officials agreed to cut the BOE’s benchmark rate to 0.25 per cent from 0.75 per cent.

The move came just hours before UK Treasury chief Rishi Sunak was due to announce tax and spending measures to tackle the virus.

BOE rate setters hadn’t been scheduled to meet until March 26. Their decision to announce a package of policy moves on the same day as the British government announces increased spending is likely designed to maximise the impact on business and consumer confidence.

Officials also agreed a new funding package for banks designed to channel credit to small businesses affected by the virus.

“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 central bank said.

The Federal Reserve cut its key interest rate in the US by 0.5 percentage point last week and the European Central Bank is expected to ease policy Thursday as the global economy reels from the novel infection.

The BOE said that some commercial banks will be unable to cut the interest rate they offer depositors, and therefore the rates at which they lend to businesses. It will offer those banks cheap loans that they can pass on to businesses.

In addition to those moves, the BOE’s Financial Policy Committee freed banks to use capital they had been required to build up over recent years through a program known as the countercyclical capital buffer. That move should also support bank lending to businesses even as the economy slows.

The UK economy entered 2020 in a weakened condition, having stagnated in the final three months of 2019. That left it vulnerable to a recession - or two quarters of declining output - should the viral outbreak prove as disruptive as many economists fear.

“While the action from the BOE and the Treasury on the same day signals policy makers’ preparedness to respond, the high degree of uncertainty around the extent of the coronavirus spread and its economic impact makes it difficult to gauge whether the new policy measures are going to be sufficient to avert a recession this year,” said Anna Stupnytska, an economist Fidelity International.

Monetary policy is somewhat limited in how much it can mitigate the negative impact of the spread of the virus, including disruptions to supply chains. However it can support investor confidence and lower borrowing costs for governments, households and businesses.

The BOE last cut its key interest rate in August 2016, responding to fears that the UK’s vote to leave the European Union would lead to a sharp slowdown. It reversed that rate cut in November 2017, and raised the key rate again in August 2018.

Dow Jones Newswires