LONDON (Reuters) – The Bank of England slashed interest rates by half a percentage point on Wednesday and announced support for bank lending just hours before the unveiling of a budget splurge designed to stave off a recession triggered by the coronavirus outbreak.
In what amounts to a choreographed double-barrelled stimulus program, the BoE announced its unanimous emergency rate cut as London markets were opening and before Prime Minister Boris Johnson’s government sets out its spending plans after midday.
Mark Carney’s parting shot as governor, which returns the main interest rate to a record low of 0.25%, comes as COVID-19, the flu-like infection caused by the virus, spreads rapidly, stoking fears of global recession and roiling markets.
“The Bank of England’s role is to help UK businesses and households manage through an economic shock that could prove large and sharp but should be temporary,” Carney told reporters after the first rate reduction since August 2016.
The cut follows a similar move from the U.S. Federal Reserve last week, and was the first such action to take place outside the British central bank’s normal schedule since the 2008 financial crisis. Bank Rate is now back to the record low it reached after 2016’s Brexit referendum.
“These measures will help keep firms in business and people in jobs and they will prevent a temporary disruption from causing longer-lasting economic harm,” Carney said alongside his successor Andrew Bailey.
Finance minister Rishi Sunak is due to present his first budget shortly after 1230 GMT, which is expected to include more healthcare funding to fight the coronavirus, as well as further economic stimulus.
Sterling briefly sank against the dollar by almost a cent on the news but recouped its losses and as of 0908 GMT traded at around $1.293, its level before the BoE cut rates. Yields on longer-dated British government bond yields rose sharply.
“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.
“The Bank will take all further necessary steps to support the UK economy and financial system.”
POWDER DRY ON QE FOR NOW
The BoE did not announce any new quantitative easing bond purchases, but did lower its counter-cyclical capital buffer for banks to zero and launch a new scheme to support lending to small businesses — both measures to keep borrowing flowing.
The BoE said it would allow banks to release a special store of capital, known as the counter-cyclical capital buffer, so they can continue lending to households and businesses during the coronavirus epidemic. Tapping the buffer means that lending up to 190 billion pounds can be supported, equivalent to 13 times banks’ net lending last year.
“Much like the Fed move we saw earlier, it’s a case of making sure that you get out there on the front foot,” Investec economist Vicky Clarke said. “They haven’t done anything on the QE front so there’s still that possibility to pull that level if they need to.”
The U.S. Federal Reserve and the Bank of Canada lowered rates last week, and the European Central Bank is expected to take action on Thursday.
The BoE’s new term lending scheme will support up to 190 billion pounds of new lending, it said.
“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,” the BoE said.
JPMorgan said the only surprise was that there was no forward guidance from the BoE.
“The only slight surprise is that there is no forward guidance about the next policy move,” JPMorgan said in a note to clients.
Reporting by David Milliken, Huw Jones, Andy Bruce, Kate Holton and Andrew MacAskill, Writing by David Milliken and Guy Faulconbridge, Editing by Catherine Evans
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