The Bank of England (BoE) has decided to cut interest rates ahead of its next meeting in late March, just hours before the Government is expected to unveil its Budget Statement to Parliament. The move was taken in response to COVID-19 and its impact on the markets, which saw steep falls in recent days.
Base rate had been at 0.75 until 10th March, when the BoE’s Monetary Policy Committee convened in a special meeting. The MPC voted unanimously to cut rates by 50 basis points, reducing base rate to 0.25 per cent.
Just a month ago, the BoE resisted calls for a rate cut, amid releases of data suggesting a post-election economic revival. COVID-19 has reversed this mentality, as shares have lost value and confidence has diminished.
Rates cut to record lows
This week’s Base Rate cut to 0.25 per cent takes interest rates back to low levels last seen in mid-2016. The BoE has typically moved base rate in smaller 25-basis-point increments in more recent years. A 50-basis-point cut hasn’t been seen since March 2009.
The BoE released a statement saying: “The reduction in Bank Rate will help support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.”
Not only did the BoE announce a cut in interest rates, but a new Term Funding scheme has been unveiled, aimed specifically at SMEs. The BoE intends to finance the scheme directly through central bank reserves, in the event that businesses struggle to have access to cashflow.
Signs of a rate cut in the offing were signalled by the bond markets in recent days. Government debt carrying a maturity from one month to 30 years now carries a yield below 0.5 per cent, suggesting that markets don’t expect a need for rates to move.
At one point this week, analysts spotted that the yields on some bonds even went negative, suggesting that investors were willing to invest in bonds, even if it meant yielding no return for them.
COVID-19 cases continue to rise
At the latest estimate, 373 people have been infected by COVID-19 in the UK, with six deaths in total, according to data compiled by the World Health Organisation (WHO).
Italy continues to be one of the hardest-hit countries in the world by the outbreak, with over 10,000 cases and over 600 deaths. Italian Prime Minister Giuseppe Conte announced a nationwide lockdown earlier this week in order to contain the virus.
While there is a lack of concrete data to measure sentiment in the housing market in response to recent turbulence so far, share of prices of housebuilders such as Taylor Wimpey and Barratt Developments have tumbled between 20-25 per cent in the last month alone.
The BOE will be hoping that this week’s emergency rate cut and its Term Funding initiative will be sufficient to revive animal spirits and prevent further falls in the markets.
The NHS has published a guide on coronavirus, informing the public about symptoms and how to minimise its spread.