Bank of England cuts main interest rate to 0.25% amid coronavirus

Mark Carney, governor of the Bank of England (BOE), gestures while speaking during the bank’s quarterly inflation report news conference in the City of London, U.K., on Thursday, Aug. 2, 2018. 

Simon Dawson | Bloomberg | Getty Images

The Bank of England (BOE) announced Wednesday an emergency cut to interest rates in an attempt to limit the economic impact from the new coronavirus.

The announcement follows a similar decision by the U.S. Federal Reserve last week. The virus that began in China late last year has spread worldwide and is impacting all major economies, with flight cancellations, panic buying and strict quarantine measures in some cases.

“At its special meeting ending on 10 March 2020, the Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25%,” the Bank of England said in a statement on Wednesday.

The central bank has also announced a new term-funding scheme to support small and medium-sized companies, as well as new steps to help commercial banks lend more. 

As of Wednesday morning, the U.K. had 382 confirmed cases of the coronavirus, including the country’s health minister Nadine Dorries. 

“Following the spread of Covid-19, risky asset and commodity prices have fallen sharply, and government bond yields reached all-time lows, consistent with a marked deterioration in risk appetite and in the outlooks for global and U.K. growth,” the BOE said in a statement, adding that “indicators of financial market uncertainty have reached extreme levels.”

Equity markets saw a major sell-off on Monday on the back of an emergency lockdown in Italy and amid fears of a price war among oil exporting countries. 

Sterling fell immediately after the BOE’s decision to $1.289 from $1.293. However, the currency has erased some of those losses since then. Meanwhile, the FTSE 100 opened in the black, trading about 1.5% higher.

A ‘mistake’

Data released last month showed that the U.K. economy stagnated in the last part of 2019. The U.K. struggled with some political uncertainty at the end of 2019. The country has also been embroiled in economic uncertainty since its decision to leave the European Union. 

“If we are now trying to encourage people to stay at home and not travel, what on earth is a rate cut supposed to do?,” Jim O’Neill, chair at Chatham House, told CNBC’s Squawk Box Europe Wednesday. 

“The rate cut part strikes me as a mistake and too soon because they might need these bullets if demand does get a lot weaker,” O’Neill, who coined the term BRIC, the acronym that stands for Brazil, Russia, India, and China, also said.

The rate cut comes as Governor Mark Carney is due to end his mandate at the bank in a couple of days. The emergency move also brought down rates to a level lower than during the sovereign debt crisis. 

“Highly unusual for the BOE to move between meetings, (it) didn’t even happen in the financial crisis after the stockmarket had crashed,” David Owen, chief European economist at Jefferies said in an email Wednesday.

Fiscal stimulus too?

The decision from the Bank of England also comes just a few hours before the country’s finance chief is due to deliver new budget plans. Rishi Sunak is expected to announce new fiscal stimulus to tackle the impact of virus.

Karen Ward, chief market strategist at JPMorgan Asset Management, said in an email: “We believe targeted fiscal measures would prove more effective (than rate cuts).

“In short, interest rate cuts will help, so long as they are playing the supporting act to pro-active government stimulus,” Ward added in an email.

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