Bank of England cuts key interest rate in response to virus

LONDON (AP) – The Bank of England slashed its key interest rate by half a percentage point to 0.25 per cent yesterday, as part of an emergency package of measures to cushion the “economic shock” of the coronavirus outbreak.

The central bank said in a statement that the move would “help support businesses and consumer confidence at a difficult time”.

The cut takes the main rate to the record low it stood at in the aftermath of Britain’s vote in June 2016 to leave the European Union (EU). And it comes just hours before the British government is expected to announce its own package of measures to shore up the economy in the face of arguably the biggest economic shock since the global financial crisis 12 years ago.

The cut follows similar reductions from the United States (US) Federal Reserve and the Bank of Canada. The European Central Bank (ECB) is also expected to announce a package of stimulus measures today.

In contrast to Italy, the epicentre of Europe’s outbreak with 10,100 cases, Britain has only 373 confirmed cases of COVID-19 and six deaths. But the outbreak has already affected the British economy in a number of ways, from hitting tourism to clogging up the global supply chains that many modern businesses rely on.

A pedestrian wearing a face mask walk past the Bank of England in London. PHOTO: AP

The Bank of England said the British economy will likely “weaken materially” in coming months due the virus outbreak. Growth projections have been slashed for all major economies around the world as the virus halts production and dents business and consumer confidence. Global stock markets have suffered their biggest daily losses since the height of the global financial crisis in 2008. Mark Carney, the outgoing governor of the Bank of England, said the economic impact of the virus outbreak will be “temporary but significant”, especially on smaller businesses, which may struggle with cash flow.

In addition to the rate cut, the bank announced a package of measures it hopes will keep money flowing through the economy. A new funding scheme will focus particularly on small- and medium-sized firms and the bank also slashed to zero from one per cent the amount of capital that banks have to keep in reserve, a move designed to bolster lending.

Carney said that, overall, the measures could make hundreds of billions of pounds available to firms and financial institutions.

“These measures will help keep firms in business and people in jobs,” Carney told a press briefing. “This is a big, big, package.”

Andrew Bailey, who succeeds Carney as governor on Monday, said the bank could do more in coming weeks if needed, including cutting its main interest rate further. The bank’s rate-setting panel is due to meet again on March 26.

Carney said the package of measures were designed together with the British Treasury and that by acting “in concert”, their impact will be maximised.

“Reacting to the stock market rout and developing economic shock from COVID-19, which has tipped major parts of the global economy into recession, UK policymakers are taking the necessary steps today to deliver a coordinated monetary and fiscal stimulus,” said Senior Economist at Berenberg Bank Kallum Pickering.

Chief economist at the Confederation of British Industry Rain Newton Smith said the measures to support businesses facing credit and cash flow issues “could make a real difference in the weeks ahead”.

Treasury chief Rishi Sunak announced further measures to support the flow of loans through the economy, which is already weighed down by uncertainty over Britain’s future trade relationship with the EU.