Bank fires up £290bn virus fund: Interest rates cut to record low

Bank fires up £290bn virus fighting fund: Interest rates are cut to record low of 0.25%

The Bank of England led a double-barrelled response to the coronavirus crisis as it unveiled an emergency package to stave off recession.

Just hours before Rishi Sunak delivered his Budget to Parliament, the central bank slashed interest rates from 0.75 per cent to a record low of 0.25 per cent.

Appearing together at the Bank in London, outgoing Governor Mark Carney and his successor Andrew Bailey also announced plans to free up an extra £290billion for lenders to loan to customers to shield them from the impact of the outbreak.

Appearing together at the Bank in London, outgoing Governor Mark Carney and his successor Andrew Bailey announced plans to free up an extra £290bn for lenders to loan to customers

Hours later in Westminster the Chancellor heaped praise on Carney and Bailey and said ‘together, we are taking action that is coordinated, coherent and comprehensive’.

Kallum Pickering, senior economist at Berenberg, said: ‘The joint action reflects the intention to send a big message that policy makers are prepared to take aggressive, pre-emptive steps to support the economy.’

As well as cutting interest rates, the Bank of England had two more cards to play.

It is offering banks and building societies the opportunity to borrow from its reserves at least 5 per cent of what they currently lend to households and businesses, at interest rates close to the new 0.25 per cent base rate.

One bank two governors  

Mark Carney and Andrew Bailey appeared alongside each other at the Bank of England yesterday before their official handover next week.

In an unprecedented move, the Governor sat alongside his successor to brief the country over their plans to shield the economy from the impact of coronavirus. 

Their appearance came before Bailey succeeds Carney at Threadneedle Street on Monday.

It followed an emergency meeting of the monetary policy committee on Tuesday when the rate cut was agreed.

Bailey joined the Bank in 1985 before becoming chief executive of the Financial Conduct Authority in 2016.

The lenders will be expected to use this to hand out cheaper loans to households and businesses.

Banks who increase their lending rather than holding back, especially to smaller businesses, will get more money from the central bank.

In total, Carney said that this could pump more than £100billion into the economy.

Another £190billion will come from reducing the ‘counter-cyclical capital buffer’, a requirement brought in after the financial crisis which forces banks to put money away in good times to be used when trouble strikes.

Before yesterday, banks were told to store cash worth 1 per cent of their loans to UK borrowers. 

This was due to rise to 2 per cent by December. But the Bank has cut this to 0 per cent, allowing lenders to use this money to support customers.

Carney said: ‘These measures will help to keep firms in business and people in jobs, and prevent a temporary disruption from causing longer-lasting harm.’

The Bank’s base rate has only ever been cut as low as 0.25 per cent once before, in August 2016, and it will be bad news for savers who have been dogged by low interest rates ever since the 2008 crash. 

But it should help stricken businesses trying to cope with the impact of the coronavirus. It will also encourage lenders to make more debt available to businesses suffering from cash flow issues or those looking to expand.

The cut was the first time the rate-setting Monetary Policy Committee has made a decision outside one of its six-weekly meetings since the financial crisis.

Mike Cherry, national chairman of the Federation of Small Businesses, said: ‘The £100billion cash injection into banks earmarked for small business lending will hopefully throw a lifeline to firms suffering from cashflow issues.’

Karim Haji, at KPMG UK, added: ‘Thanks to a decade of scrutiny around banks’ capital resilience and rigorous annual stress tests, the finance sector is in a good position to help but it won’t be a comfortable journey.’


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