The Bank of England has cut interest rates again in an emergency move as it tries to support the UK economy in the face of the coronavirus pandemic. It is the second cut in interest rates in just over a week, bringing them down to 0.1% from 0.25%. Interest rates are now at the lowest
The Bank of England has cut interest rates again in an emergency move as it tries to support the UK economy in the face of the coronavirus pandemic.
It is the second cut in interest rates in just over a week, bringing them down to 0.1% from 0.25%.
Interest rates are now at the lowest ever in the Bank’s 325-year history.
The Bank said it would also increase its holdings of UK government and corporate bonds by £200bn with an effort to lower the cost of borrowing.
It’s a dramatic move by Andrew Bailey, who only took over from Mark Carney as Bank of England governor on Monday.
Last week, the Bank announced a 0.5% cut in rates to 0.25% and a package of of measures to help businesses and individuals cope with the economic damage caused by the virus.
The move coincided with additional measures announced by Chancellor Rishi Sunak in the Budget.
However, the Bank said the measures it had taken so far were not going to be enough, and believed “a further package of measures was warranted”.
“The spread of Covid-19 and the measures being taken to contain the virus will result in an economic shock that could be sharp and large, but should be temporary,” it added.
The move comes as international investors are trying to secure more cash, in particular dollars. This means they’re ditching assets such as UK government gilts, which are the “IOU” notes the government hands over to private investors willing to lend it money.
As the gilts are sold, the price drops and the yield – the effective interest rate compared to the price – rises. What that means is the cost of borrowing to private investors as well as to the government rises – just when the Bank of England wants it to fall and the government is about to borrow huge sums.
The Bank of England’s plan to buy £200bn more bonds is aimed at fighting that effect.
The fresh rate cut takes interest rates to the lowest they can feasibly go, said Jeremy Thomson-Cook, chief economist at payments company Equals Group.
“Lower rates and additional quantitative easing can keep markets satisfied and borrowing costs for both businesses and the government down but unless money is forced into the hands of small businesses soon, then it will be for nothing; they are the ones laying off staff due to a liquidity shock,” he added.
The Bank of England chose not to wait any longer. Rates have simply never been this low in the Bank of England’s 325-year history.
Perhaps even more significantly, the programme of purchases of Government bonds – the financial products the Treasury sells to fund public spending – has been increased again by the biggest ever amount – £200bn.
Added to the stock of similar Bank of England purchases during the financial crisis, and in the aftermath of the EU referendum bill, that brings the total is £645bn, meaning the Bank of England will own over a third of the national debt.
The impact of this should be not just to lower short-term interest rates, but also bring down longer term lending rates of over five or 20 years or longer.
But the cut in the base rate to 0.1% is a double-edged sword for the banking system. It becomes far more difficult to make returns at near zero interest rates.
Clearly, monetary policy remains a blunt tool to deal with a pandemic and the resulting economic fallout.
This does create some space, though, for much more action on taxing and spending – a fiscal stimulus of enormous proportions – to deal with the enormous economic hit from the virus.