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Economic boost

Bank cuts interest rate to counter coronavirus crisis

Bank of England

Bank of England: help for economy (pic: Terry Murden)

The Bank of England has announced an emergency cut in the interest rate in the face of coronavirus by 0.5% to 0.25% – the joint lowest in history.

The move comes just hours before Chancellor Rishi Sunak is expected to unveil a package of measures to support the economy.

In a statement, the Bank said: “Activity is likely to weaken materially in the United Kingdom over the coming months.

“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.”

However, some commentators will question the effectiveness of a rate cut with the cost of borrowing already at rock bottom. The cut is likely to be unwound once the crisis is over.

The Bank has admitted 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.

Therefore it has set up a funding scheme to help out by providing more than £100bn of funding to banks at rates close to the new bank rate which should mean cheaper loans for businesses.

The Bank has also cut a special capital buffer banks have been forced to hold as a reserve against market difficulties. Banks have been holding a special pot, worth about 1% of assets.

It followed the lead set by the US Federal Reserve, which also cut its core rate by a similar margin last week following an unscheduled meeting of policymakers.

After initially falling on the Bank of England’s announcement the pound is back in positive territory, trading up 0.37% against the dollar.

The FTSE 100 rose about 1.35%. Shares in major UK banks, including Lloyds, RBS and Barclays, rose between 1% and 2%.

Reaction

Laura Suter, personal finance analyst at investment platform AJ Bell, said: “While the package of measures will help businesses they will be light relief for individuals, who are unlikely to see a big impact from the cuts.

“Mortgage rates are already near record lows and it’s unlikely providers will be able to cut them much more – let alone pass on the entire rate cut. The exception is those on tracker rates, who will see a near-immediate effect on their monthly repayments.

“What’s more, savers who have already seen a swathe of cuts to the interest they get on their cash are likely to be hit further. The top rate you can get on an easy-access cash account at the moment is 1.3%, far below the current rate of inflation, and this now looks ripe for another cut following today’s move.

“Cash savers will feel they’ve been dealt another blow after years of being clobbered with below-inflation rates – meaning they are losing money in real terms.

“However, the potential cut to interest on debt could come at a crucial time for some. One in eight adults have no savings at all and 45% of the population have less than £2,000 in cash – so if coronavirus starts to hit people’s earnings we could see a big rise in the level of debt people have to take on just to pay the bills.

While these measures can’t hurt, on their own they are unlikely to have a huge effect

– Luke Bartholomew, ASI

“If the rate people are paying on this debt falls it could provide some support at the edges.”

Luke Bartholomew, Investment Strategist at Aberdeen Standard Investments, said: “In light of the dramatic market moves we have seen over the last few weeks, the decision made by the Bank of England to cut interest rates is not especially surprising.

“While these measures can’t hurt, on their own they are unlikely to have a huge effect and monetary policy is clearly reaching the limit of what it can achieve.

“However its impact can be multiplied if it is also combined with significant fiscal easing. Coordinated policy helps to reassure investors that policy makers will do whatever it takes to try to mitigate any economic damage.

“That is why it is so important the government announces an aggressive package of fiscal support in the budget today.

“This should include a significant increase in resources for the health service and measures to support the incomes and cash flows of businesses through the worst of the crisis to ensure firms do not get tipped into bankruptcy due to temporary problems.”

Mike Cherry, chairman of the Federation of Small Businesses, said: “Small firms need all the help they can get at this difficult and uncertain time and they will be hoping that the prompt use of monetary policy levers eases cashflow concerns, particularly for businesses heavily dependent on high footfall.

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