The Bank of England has announced an emergency cut in interest rates to help the country cope with the economic shock of the coronavirus outbreak.
Interest rates have been reduced to 0.25 per cent from 0.75 per cent, taking borrowing costs back to their lowest level ever.
The bank also freed up £100 billion of extra lending power to help banks support small and medium-sized businesses. It will offer four-year funding to banks at low rates over the coming 12 months.
It said that the interest rate cut was part of a “package of measures to help businesses and households bridge across the economic disruption that is likely to be associated with Covid-19”. It added that the disruption “could prove sharp and large, but should be temporary”.
The move follows interest rate cuts in the United States last week and had been expected as part of a co-ordinated response, with the chancellor expected to announce further measures in the budget later to support growth and jobs.
The British Chambers of Commerce said: “Businesses will welcome the decisive action taken by the Bank of England to support the economy at this delicate moment.”
Lord O’Neill, crossbench peer and former Treasury minister, was critical. “It’s a bit early in where we’re going with this virus and the impetus monetary policy can have in these circumstances is exceptionally limited,” he told the Today programme.
John McDonnell, the shadow chancellor, said: “We now need firm and sufficient support from the government for all those having to self-isolate, many of whom do not have access to statutory sick pay.”
The Office for Budget Responsibility is expected to forecast a cut in GDP growth for this year and next, according to a consensus of independent estimates published by the Treasury. The estimates do not take into account the impact of coronavirus.
A year ago the OBR forecast growth of 1.4 per cent in 2020 and 1.6 per cent for each of the next three years. The latest consensus is 1.1 per cent this year and 1.4 per cent next.
Jefferies, the investment bank, has predicted that the UK will manage 0.2 per cent growth this year as business grinds to a halt and people stay at home because of coronavirus.
David Owen, chief European financial economist at Jefferies, said that the rate cut was an unusual move for the Bank, pointing out that it “didn’t even happen in the financial crisis after the stock market had crashed”.
Rain Newton Smith, CBI Chief Economist, said: “Measures to help the flow of credit and support businesses potentially facing cash flow issues could make a real difference in the weeks ahead.
“All eyes are now on the Chancellor today to do his part. This is a timely, proportionate response to a serious situation, though it’s vital policy is kept under review as things improve.”
To support lending, the Financial Policy Committee has cut to zero its requirement for banks to hold capital as a buffer against a financial crisis. The rate had been 1 per cent and was due to rise to 2 per cent by December. Economists at Capital Economics said that this would free up an extra £190 billion for banks to lend to businesses.
The FTSE 100 and FTSE 250 rose by 1.4 per cent and 1 per cent respectively and the pound strengthened against the dollar to $1.2944 after initially dropping to $1.2847.