The Bank of England has cut the bank rate by 50 basis points to 0.25 percent from 0.75 percent in an emergency move to help UK businesses and households amid the disruption associated with COVID-19.
The Monetary Policy Committee voted unanimously during an unscheduled meeting to reduce bank rate, taking borrow costs down to the lowest level in history.
The Bank of England stated that its role “is to help UK businesses and households manage through an economic shock that could prove sharp and large, but should be temporary”.
Discussing the cut to the interest rates, the bank explained that “when interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates”.
The Bank of England will 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 bank added: “In order to mitigate these pressures and maximise the effectiveness of the monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5 percent of participants’ stock of real economy lending at interest rates at, or very close to, bank rate.”
The bank will maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion.
Additionally, the bank will maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.
Commenting on the decisions made by the Bank of England, Ivan Petrella, associate professor at Warwick Business School and an expert in economic policy, said: "This is a timely move by the Bank of England, taking a number of preemptive measures aimed at supporting the economy in the face of the COVID-19 epidemic.”
He also suggested that the cut to the interest rate and new term funding scheme, would “provide liquidity and much-needed support for small and medium-sized enterprises, which are most vulnerable to the COVID-19 shock”.
"The timing, ahead of the measures expected in the 2020 Budget, gives a clear indication that UK policymakers are ready to make a coordinated effort to support the economy. The fact that fiscal and monetary policy will be singing the same tunes will certainly be welcomed by the markets,” Petrella concluded.
According to the UK Government website, as of 10 March at 9am, 26,261 people have been tested in the UK, of which 25,888 were confirmed negative and 373 were confirmed as positive. Of those that tested positive for COVID-19, six patients have died.
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