The Bank of England on Thursday unexpectedly cut interest rates to a record low 0.1% and announced plans to buy more UK bonds, the latest in a series of emergency actions triggered by the fast-escalating coronavirus crisis.
The central bank’s Monetary Policy Committee held an extraordinary meeting on Thursday 19 March and decided unanimously to cut the headline interest rate by 15 basis points from 0.25% to 0.1%.
The cut takes UK interest rates to an all-time record low, below even where they sat in the wake of the financial crisis. It also marks the second surprise interest rate cut from the Bank of England in as many weeks. Threadneedle Street cut interest rates from 0.75% to 0.25% just last Wednesday.
Alongside the interest rate cut, the Bank of England said it would buy an additional £200bn ($244bn) of UK bonds in a bid to calm debt markets. The Bank of England will mainly buy UK government bonds but will also buy some corporate debt.
The purchases will take place “as soon as is operationally possible” and will take the Bank of England’s bond holdings up to £645bn. The purchases will be financed by the release of central bank reserves.
The Monetary Policy Committee on Thursday also voted to expand the Bank of England’s new term funding scheme for small businesses, which allows banks to extend cheap loans to small enterprises struggling due to coronavirus.
The surprise measures follow a rush of selling in UK government debt and the pound. 10-year government debt experienced its highest-one day jump in yield since 2009 on Wednesday, according to Reuters. Bond yields rise when prices fall.
In currency markets, sterling dropped to its lowest level against the dollar since 1985. Analysts said the measure was driven by a global rush for dollars as the Covid-19 pandemic sparks a likely global recession.
“We were moving into conditions... bordering on disorderly,” Bank of England governor Andrew Bailey told journalists on a call on Thursday afternoon.
“We are in an absolutely unprecedented situation. Just the sheer uncertainty we’re having to deal with... is absolutely being writ large in financial markets. The Bank of England and the Monetary Policy Committee felt we had to assess and respond.”
The policy measures had an immediate positive effect. Sterling was up 1.1% against the dollar to $1.1716 (GBPUSD=X) and up 2.1% against the euro to €1.0837 (GBPEUR=X) shortly after the announcement on Thursday afternoon.
The package of measures is the latest in a string of measures announced by the Bank of England and the Treasury aimed at combating the economic fallout from Covid-19. Mark Carney, who was until Sunday Bank of England governor, announced a stimulus package worth “north of 1%” of GDP last week. Earlier this week the Treasury and Bank of England announced a new programme to buy up UK commercial debt to support the UK economy.
Bailey said on Thursday the Bank of England stood ready to do more if needed. The Monetary Policy Committee has a regular scheduled meeting next Thursday.
George Buckley, chief European economist at Nomura, said: “There can be no question that the monetary and fiscal authorities are throwing everything they can at this problem to support firms and households, cushion demand as much as is reasonably possible, and to reduce the long-term hit to supply.”
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