Base Rate now stands at an unprecedented 0.25%, which will leave mortgage borrowers on tracker rates with lower monthly payments but is bad news for savers.
The Bank of England says the Covid-19 outbreak will result in an “economic shock that could prove sharp and large, but should be temporary”.
In a statement the Bank said: “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.
“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.
“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.”
Term Funding scheme
As well as the rate cut, the Monetary Policy Committee (MPC) voted unanimously for the Bank of England to introduce a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves.
Over the next 12 months, the TFSME will 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, now at 0.25%.
Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs). Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.
The MPC also voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion; and to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.
Countercyclical capital buffer rate reduced to 0%
In addition, the Financial Policy Committee (FPC) has reduced the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect. This will further support the banks in supplying credit The rate had been 1% and had been due to reach 2% by December 2020.
The FPC expects to maintain the 0% rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest.
The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019.
Together with the TFSME, 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.
