BOE Cuts Rates in Coordination With Treasury Virus Response
The Bank of England cut interest rates in an emergency move and announced measures to help keep credit flowing through the economy, saying the coronavirus outbreak will damage economic activity. The pound fell.
The move to cut the benchmark rate by 50 basis points to 0.25% comes a week after the Federal Reserve slashed its main rate, and just hours before the U.K. government announces spending measures in its budget. The European Central Bank, which holds its policy meeting tomorrow, is expected to join the growing wave of crisis easing with its own measures.
What investors may like is the BOE is delivering a large rate cut like the Fed, yet is also targeting aid to those businesses who may suffer an economic backlash from the virus. The response signals coordination between the central bank and the government which may again please markets and serve as a model for policy in other economies.
The pound dropped as much as 1.2% against the euro to the weakest level since October, while FTSE 100 Index futures briefly erased declines.
The BOE’s decision was unanimous among the nine policy makers. They also said they are introducing a new scheme to ensure companies can easily and cheaply access credit. That’s seen as a crucial crisis response if businesses are forced to shut because of the virus outbreak, which will hit cash flow and make it harder to cover bills, wages and other costs.
“Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months,” the BOE said in early morning statement on Wednesday.
Read More: Central Bankers Discussed Crisis on Sunday in BIS Phone Call
The new Term Funding Scheme will include special incentives for smaller firms, and it will be financed by the issuance of central-bank reserves.
The BOE also cut the countercyclical capital buffer to 0%. That’s a reserve held by banks, and the reduction should free up cash for them to lend.
©2020 Bloomberg L.P.