UK cuts rates, poised to unveil stimulus measures

The Bank of England has cut its key interest rate and British Treasury chief Rishi Sunak is due to announce tax-and-spending measures to tackle the virus.

Britain's Chancellor of the Exchequer Rishi Sunak. Picture: AFP

The Bank of England has cut its benchmark interest rate in a move aimed at cushioning the British economy from the impact of the coronavirus.

At a special meeting of its policy committees on Wednesday night, officials agreed to cut the BoE’s benchmark rate to 0.25 per cent from 0.75 per cent.

The decision comes just over a week after the Federal Reserve cut its key interest rate in the US by 0.5 percentage point, while the European Central Bank is expected to ease policy on Thursday as the global economy reels from the epidemic.

The pound weakened in response to the BoE’s announcement, but the currency’s move was modest, since investors had expected the BoE to cut its key rate.

The move comes just hours before British Chancellor of the Exchequer Rishi Sunak was due to announce tax-and-spending measures to tackle the virus.

“That the BoE chose to announce its stimulus on the same day as the budget is telling,” said Kallum Pickering, an economist at Berenberg Bank.

“The joint action reflects the intention to send a big message that policymakers are prepared to take aggressive and pre-emptive steps to support the economy.”

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. In a co-ordinated announcement, Britain’s Prudential Regulation Authority, which supervises banks, warned lenders against increasing dividend payments to shareholders or bonuses to its workers in response to the moves.

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 BoE said some commercial banks would be unable to cut the interest rate they offer depositors, and therefore the rates at which they lend to businesses. It would offer those banks cheap loans that they can pass on to businesses, estimating that total take-up could be around £100bn ($198bn).

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 British 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 policymakers’ 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 at Fidelity International.

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.

The Wall Street Journal