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Bank of England cuts rates as emergency coronavirus measure

by LLB Editor
19th Mar 20 3:34 pm

The Bank of England (BoE) on Thursday unveiled an emergency interest rate cut for the second time in just over a week.

The bank trimmed its main rate to 0.1%, which is the first time in the history of the Bank.

In a special meeting on Thursday, the Monetary Policy Committee also voted to increase its quantitative easing programme by £200 to a tbnotal of £645bn.

Ivan Petrella, associate professor of economics at Warwick Business School said, “The fact that the Bank of England is ready to step up its efforts to stimulate the economy gives the UK a clear advantage over countries in the EU.

“It is now clear that the prolonged impact of a shut-down to the economy, coupled with the large fall in demand and related uncertainty, will most likely lead to a severe downturn unless we see more drastic and decisive policy actions. That will most likely lead to a massive credit crunch for large sectors of the economy.

“So far, the government has put forward a fiscal package of a similar size to other European countries to support businesses, but it falls short of direct support to jobs. This is most likely the area where the government will have to intervene in the coming weeks if it aims at prevent a wave of lay-offs.”

Ranko Berich, Head of Market Analysis at Monex Europe said, “The Bank of England has decided to cut interest rates by 15 basis points to 0.1%, and will increase asset holdings by £200bn following an extraordinary meeting. The measures come after the Treasury announced a Corporate Financing Facility to provide funding to non-financial businesses.

“Next week’s BoE meeting is likely to feature some uncomfortable consideration of potential future moves. Given the BoE’s opposition to cutting rates into negative territory, we are now at the limit of conventional policy options.

“If further monetary easing is necessary, QE expansion and further liquidity operations are the likely options. In the worst case scenario where the crisis escalates and these options are also exhausted, the next frontier for policy experimentation would be direct financing of fiscal stimulus – an extreme option that would have been unthinkable even months ago.

“What the BoE is trying to do here is prevent the social and economic crisis triggered by coronavirus turning into a financial crisis. The brief statement accompanying the decision made it clear that it was driven by recent developments in UK gilt markets, which like other global sovereign debt markets have seen long-dated yields rise rapidly in recent days amid high volatility and poor liquidity.

“The resumption of QE, which will be predominantly targeted at government debt, seeks to address this. Other indicators of financial distress, such as LIBOR-OIS spreads, continue to indicate extreme stress in financial markets, as does the global freefall in equities and rampant US dollar strength.

“Sterling is rallying today after reaching its lowest point against the US dollar since 1985, although with broad moves in risk appetite and dollar demand dictating the terms for currency markets globally, this reprieve may prove feeling.

“If sterling does weaken again, the MPC is likely to have bigger fish to fry and another bout of weakness would likely to be acceptable for now. What policy is seeking to do is stabilise domestic sovereign markets and get liquidity to the real economy.”

Dr. Kerstin Braun, President of Stenn Group, an international provider of trade finance headquartered in the UK, comments on the Bank of England’s move to lower interest rates to 0.1%.

Dr Braun said, “Today’s move by Andrew Bailey is surprising. The Chancellor has only just announced a huge £330bn rescue package for businesses and it will be too soon to see any real effect. Governments around the world are having to act forcefully to prevent the economic hit from deepening, taking a coordinated approach and opening the liquidity pipe for both fiscal and monetary support.

“Reduced rates will not be enough to prop up the economy alone and we know from recent weeks it’s unlikely to restore confidence in investors, so we could see global shares fall further in the coming days.

“Access to cheap money is not our biggest problem right now but it does provide an important cut in borrowing costs for businesses and consumers at this delicate moment, helping to provide some financial respite from the virus. At the beginning of the year, before the coronavirus, our study found half of UK firms predicted a 2020 recession and we’re starting to see this play out.”

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