In an emergency move designed to stem the economic impact of the coronavirus, the Bank of England on Wednesday (March 11) cut the country’s interest rate by 50 basis points to 0.25 percent. The central bank’s Monetary Policy Committee also voted unanimously to put in place a term funding program with incentives for small- to -medium-sized businesses, backed by central bank reserves.
“The reduction in Bank Rate will help to 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,” the central bank said in a press release.
The central bank acknowledged that it might be difficult for financial institutions (FIs) to reduce their deposit rates and that also could limit the banks’ ability to cut their lending rates. As part of the economic plan, the B0E is making additional funds available to FIs that increase lending, especially to SMBs. The central bank said it anticipated the program could provide more than £100 billion ($129.5 billion) in term funding, based on its experience with a previous program in 2016.
In another move to bolster the U.K.’s financial community, the central bank’s Financial Policy Committee cut the country’s countercyclical capital buffer rate to zero percent of banks’ exposures to U.K. borrowers, effective immediately. The rate was previously 1 percent and was supposed to be raised to 2 percent by the end of the year. The FPC expects to keep the zero percent rate for at least the next 12 months. The bank said the action was “to support further the ability of banks to supply the credit needed to bridge a potentially challenging period.”
The incoming BoE Governor Andrew Bailey had voiced reluctance last week to drop the interest rate, however, the continued economic malaise prompted the central bank's action. It anticipates the lowering of the buffer will support up to £190 billion ($246 billion) of bank lending to businesses. Coupled with the other funding, the BoE said “banks should not face obstacles to supplying credit to the U.K. economy and to meeting the needs of businesses and households through temporary disruption.”