Bank of England cuts rates to 0.1%

This month there’s been an emergency cut in interest rates in the face of coronavirus by 0.5% to 0.1% – the lowest in history.

The rate cut is about trying to help businesses cope with the effects of the coronavirus – and there is expected to be quite a lot in the Budget in that vein as well.

The dramatic emergency rate cut will dominate the headlines, but it is the overall package of measures which the departing Bank of England governor Mark Carney stressed as a support for the economy in this extraordinary coronavirus crisis.

The key target of this move is the cashflow of small and medium-sized businesses, which could be hit by a combination of slumping demand, trade difficulties and staff absence.

The Bank and Treasury agree that this will be a temporary shock. The aim, therefore, is to prevent unnecessary permanent economic scars. Alongside Budget measures, it is designed as a bridge beyond the virus.

So the Bank’s base rate is slashed to its record low, first reached 0.25% in the aftermath of the EU referendum. But as important is the new TFSME – the “Term Funding scheme with additional incentives for Small and Medium-sized Enterprises”.

This proved rather successful after the EU referendum, and the aim is to get the banks to pass on the rate cut in full to businesses, particularly small and medium-sized firms, which face the greatest pressure to cut staff or hours in a crisis.

The deployment of the counter-cyclical buffer, lowering capital requirements for banks by 2%, was designed for exactly this sort of rainy day. It should provide the firepower for banks to boost lending well above current lending levels.

To be clear, coronavirus is unique and highly unpredictable. There is a fundamental problem of people and businesses not being able to function because of the measures to contain the virus. The message from the Bank is that the banking system is fully padded up to help businesses get through this.

Market update
The pound slumped 0.5% against the euro to €1.136 and was little changed against the dollar at $1.289. The cut in rates makes the UK less attractive as a place to deposit money by foreign investors seeking cash deposits or bonds.

Share markets reacted positively, albeit after a choppy week. The FTSE 100 rose 1.4% in early trading.

More firepower from the BoE
Another thing the Bank did was to cut a special capital buffer banks had to hold. Essentially, banks must set aside provisions for a rainy day. That’s their capital. It’s what insulates them from oblivion if borrowers don’t repay and protects your deposits. Banks have been holding a special pot, worth about 1% of assets, just in case times turn bad.

The Bank has now released them from holding that, so they can lend more or absorb more losses.

“The release of the countercyclical capital buffer will support up to £190bn of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019,” it said.

This big fat package of measures means no excuses from the high street banks, says the BoE:

“This means that banks should not face obstacles to supplying credit to the UK economy and to meeting the needs of businesses and households through temporary disruption.”

No matter what this year has in store, check in with us regularly to ensure you’re on the best products for your needs – lenders continue to offer attractive deals, we can find the most suitable one for you.

We don’t tend to publish mortgage rates on our website. In most cases rates are negotiable and based squarely on the individual circumstances of the borrower, their plans, assets and income.

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The above article is purely for information purposes and does not constitute advice.

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