The Bank of England dropped interest rates by 50 basis points (0.5 percentage points) early on Wednesday morning in an attempt to stimulate the economy amid turmoil in the markets caused by concerns over novel coronavirus and an unfolding crude oil price war.
The unscheduled reduction in the bank rate from 0.75 per cent to 0.25 per cent took borrowing costs back to their lowest ever level and helped to bring optimism to European markets, with the Europe-wide Stoxx 600 gaining 1.8 per cent and the FTSE 100 up 1.7 per cent shortly after the markets opened.
The cut came after stock markets worldwide plunged on Monday, following an announcement by Saudi Arabia over the weekend that they would slash oil prices and increase production after a disagreement with Russia. Many markets saw their sharpest one-day falls since the height of the financial crisis in October 2008, although stocks rallied slightly the day after.
Other European stock markets made gains on Wednesday morning immediatelys following the Bank’s announcement, with the German Dax 30 adding 1.9 per cent and France’s Cac 40 gaining 2.2 per cent. The rise in equities came despite further falls in the price of oil after Saudi Aramco said it would increase oil production from 12 million to 13 million barrels per day.
Threadneedle Street 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”.
Paul Dales, chief UK economist at Capital Economics, told the Financial Times that the Bank’s Monetary Policy Committee had “pulled the trigger on its double-barrelled shotgun” and that while the move would not stop the economy stagnating or contracting in the second and third quarters, “it will help to ensure that the economy can bounce back . . . once the virus has peaked.”
The Bank also made £100 billion of extra lending power available to help banks support small and medium-sized businesses. It said it will offer four-year funding to banks at low rates over the coming 12 months. In what is expected to be a coordinated response to the crisis, chancellor of the exchequer Rishi Sunak is anticipated 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.”
The Office for Budget Responsibility (OBR) is expected to forecast reduced economic growth for this year and 2021, according to a census of independent estimates published by the Treasury. Those estimates do not even take coronavirus into account.
The latest consensus is that Britain will manage 1.1 per cent growth this year, down from the OBR’s forecast last year of 1.4 per cent. However, investment bank Jefferies has predicted that the UK will only manage 0.2 per cent growth this year as business grinds to a halt and workers have to stay quarantined at home.
Anna Stupnytska, at Fidelity International, told The Times: “While the action from the Bank of England and the Treasury on the same day signals the policymakers’ preparedness to respond, the high degree of uncertainty around the extent of the coronavirus spread and its economic impact makes it difficult to gauge whether the new policy measures are going to be sufficient to avert a recession this year.”
The news came as several high street banks offered to defer mortgage and loan payments for borrowers affected by the virus. Royal Bank of Scotland, which is 62 per cent publicly-owned and owns NatWest, has offered a moratorium of up to three months on repayments. Barclays said it would halt penalty charges for people withdrawing money from fixed-term savings accounts early and allow credit card holders temporary increases on their credit limits. Lloyds, which owns Halifax, said it would defer mortgage payments and waive fees on missed credit card payments. TSB said it would allow two months’ grace on mortgage payments.
The virus has also reached government, with health minister Nadine Dorries diagnosed with coronavirus on Saturday following a series of meetings in Westminster, her local GP surgery and a function at Number 10, sparking concerns that the virus may now be circulating in Westminster and renewing calls for Parliament to be suspended until the outbreak dies down.
11th March 2020.