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.
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.
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.
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.
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”.
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.