The Bank of England today announced an emergency cut in interest rates as the country grapples with the coronavirus outbreak.
Threadneedle Street slashed rates by 0.5% to 0.25% – the joint lowest in history.
Outgoing Bank of England governor Mark Carney said: “Activity is likely to weaken materially in the coming months” in the wake of coronavirus, says Governor Mark Carney. Smaller companies will be worst hit.
“The reduction in bank rate will help bolster confidence at this difficult time,” he added.
Celine Hartmanshenn, Global Head of Risk at Stenn Group, an international provider of trade finance headquartered in the UK, comments on the BoE’s decision to cut interest rates to 0.25% as an emergency measure: “The Bank of England has wasted no time cutting rates to near rock bottom levels. But while it may bring some benefit to consumers and heavily indebted companies, lowering interest rates is unlikely to help prevent the economic wrath of the coronavirus. We saw this already in the trade war. Lowering rates helps the stock markets, which will become more relaxed now, but the real economy isn’t the stock market.
“It’s unlikely that indebted companies, those in need of financial support, will be unable to access further loans from banks, as they’ll be looking at ratios of balance sheets, and there is an end of the line which was reached way prior to the trade war. These companies will now need to look to private lenders and alternative finance providers instead.
“Cheaper money also won’t have much effect in a supply shock. Manufacturing is where we will see one of the biggest crunches, and will cause the economy to dip. The volume of goods being produced is lowering, as factories in China, usually in a dominant manufacturing position, are operating at about 50% of the workforce. This will have a ripple effect around the world, not just in the UK but emerging markets who rely on China for goods.
“The ECB is due to report tomorrow and we’re expecting a reduced rate also, but it’s a mistake for central banks to use Coronavirus as an excuse to lower interest rates. It would be more effective for governments to introduce temporary tax breaks, new loan programs, or other financing to companies hurt by the virus. This is all about raising stock prices and lowering borrowing costs. The measures put forward by the world’s bankers can’t keep workers from getting sick or factories from closing.”