Shock move: Bank of England slashes key rate over virus fears

The half-percentage-point cut is the first outside the central bank’s normal schedule since the 2008 financial crisis.

Bank of England five-pound note
The Bank of England's decision to cut rates follows earlier rate cuts by the US Federal Reserve and Bank of Canada [File: Jason Reed/Reuters]

The Bank of England (BoE) unexpectedly cut interest rates by half a percentage point to 0.25 percent on Wednesday in a move to bolster the United Kingdom’s economy against disruption caused by the coronavirus outbreak.

“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,” the BoE said.

The cut was the first move to take place outside the BoE’s normal schedule since the 2008 financial crisis. It takes the Bank Rate – which is the interest rate the BoE pays commercial banks for their deposits with the central bank – back to the record low it reached after 2016’s Brexit referendum. 

Chancellor of the Exchequer Rishi Sunak, the UK’s finance minister, is due to present his first budget shortly after 12:30 GMT, which is expected to include more healthcare funding to fight the coronavirus, as well as further economic stimulus.

The British pound sank by more than half a cent against the US dollar after the news of the first rate cut since August 2016. London’s FTSE 100 futures jumped 0.9 percent.

Last week the US Federal Reserve and the Bank of Canada lowered rates, and the European Central Bank is expected to take action on Thursday.

The BoE did not announce any new bond purchases, also known as quantitative easing, which would have injected large amounts of funds into the economy. But it did lower a key capital buffer for banks to zero from 1 percent and launched a new scheme to support lending to small businesses – both measures to keep borrowing flowing.

“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,” the BoE said.

However, it warned companies not to use the cash for bumping up bonuses or dividends.

The release of the buffer will support up to 190 billion pounds ($245bn) of bank lending to businesses, equivalent to 13 times banks’ net lending to businesses in 2019, the BoE said.

“The [Financial Policy Committee] expects to maintain the 0 percent rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest,” the BoE said.

“Although the disruption arising from Covid-19 could be sharp and large, it should be temporary.”

Six people have died in the UK from the virus, with 373 confirmed cases. The number of infected people includes health minister Nadine Dorries, who was reported to have been in touch with Prime Minister Boris Johnson.

Source: Reuters