Borrowing costs down to lowest level in history as Coronavirus continues to damage the economy
Bank of England cuts interest rates in emergency move
- Bank of England slashes interest rates from 0.75% to 0.25%
- The announcement comes ahead of Rishi Sunak’s Budget which is likely to be focussed on alleviating the stress on the economy and support key health services
- Surprise announcement reversed the stock market opening levels from a 1% loss to 2% rise
- This will help cushion the blow to a number of businesses, especially smaller ones, but it may do little to boost spending among consumers preparing for harder times
The Bank of England has followed its US counterpart and other Central Banks by making an unscheduled intervention in financial markets, with a 0.5% cut in interest rates amid rocky conditions in financial markets. It comes ahead of when Rishi Sunak was due to reveal his Budget, which is likely to be focussed on alleviating the stress on the economy and markets, and boosting spending levels that are critical to a well-functioning health service in this crisis.
Co-ordinated monetary and fiscal measures should in theory be complementary, and show consumers and businesses that authorities are acting. Ahead of the announcement, markets indicated that the FTSE100 would open down by roughly 1% and immediately afterwards, indications turned to a 1% rise on the UK stock market with the actual market opening up by 2% at 8am.
However, this is little relief for investors who have lost around 20% over the past month and this morning's moves will just become part of the noise in this crisis. The very small moves in the Pound immediately after the announcement may be a better reflection of the insignificance that global investors place on this event in the context of the current events.
In the UK, lower interest rates come alongside a range of other measures announced, such as the Term Funding for Small and Medium Enterprises (TFSME), reduction of the counter cyclical capital buffers to zero, and that freed up capital is not to be paid out as dividends or bonuses by banks. This will help cushion the blow to a number of businesses, especially smaller ones, but it may do little to boost spending among consumers preparing for harder times. Seen to be doing something is better than doing nothing.
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