Bank of England slashes base rate by 0.5% in response to Covid-19

The Bank of England slashed its base rate to 0.25% from 0.75% on Wednesday in an emergency move to combat the economic impact of the coronavirus.

The central bank's monetary policy committee (MPC) voted unanimously to cut the rate at an unscheduled meeting held on Monday. The cut comes in Mark Carney's final week as its governor and on the day of Finance Minister Rishi Sunak’s first budget.

"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 UK growth. Indicators of financial market uncertainty have reached extreme levels," the bank said in a statement.

"Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months."

The bank said "temporary, but significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for short-term credit from households and for working capital from companies".

"Such issues are likely to be most acute for smaller businesses. This economic shock will affect both demand and supply in the economy."

A term funding scheme with extra incentives for small and medium-sized businesses, funded by central bank reserves, to help businesses amid the unfolding economic crisis, was unveiled as the bank moved to avert the crisis that has crippled Italy in recent days.

Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs), the BoE said.

The scheme could provide in excess of £100bn in term funding while the rate cut would help to support business and consumer confidence, bolster the cash flows of businesses and households, and reduce the cost and improve the availability of finance.

“Although the disruption arising from Covid-19 could be sharp and large, it should be temporary,” the bank said.

“The Bank of England’s role is to help UK businesses and households manage through an economic shock. These measures will help to keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm.”

The MPC voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10bn. It also voted to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435bn.

In order to mitigate pressures on banks and building societies and maximise the effectiveness of monetary policy, the term funding scheme (TFSME) would, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate, the BoE said.