Britain fires with both barrels: emergency rate cut and budget boost

LONDON (Reuters) – The Bank of England cut interest rates by half a percentage point to 0.25% and announced measures to support bank lending ahead of a budget that is set to open the taps on spending to bolster Britain’s economy against the coronavirus outbreak.

“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,” the BoE said.

The cut follows a similar move from the U.S. Federal Reserve last week, and was the first move to take place outside the BoE’s normal schedule since the 2008 financial crisis.

Bank Rate is now back to the record low it reached after 2016’s Brexit referendum.

“The Bank will take all further necessary steps to support the UK economy and financial system, consistent with its statutory responsibilities,” the BoE said.

Governor Mark Carney and his successor Andrew Bailey will hold a joint news conference at 0900 GMT.

Finance minister Rishi Sunak is due to present his first budget shortly after 1230 GMT, which is expected to include more healthcare funding to fight the coronavirus, as well as further economic stimulus.

Sterling sank by more than half a cent against the U.S. dollar after the news of the first rate cut since August 2016.

The BoE did not announce any new quantitative easing bond purchases, but did lower its counter-cyclical capital buffer for banks to zero and launch a new scheme to support lending to small businesses – both measures to keep borrowing flowing.

“Much like the Fed move we saw earlier, it’s a case of making sure that you get out there on the front foot,” Investec economist Vicky Clarke said. “They haven’t done anything on the QE front so there’s still that possibility to pull that level if they need to,” she added.

Last week the U.S. Federal Reserve and the Bank of Canada lowered rates, and the European Central Bank is expected to take action on Thursday.

The BoE’s new term lending scheme will support up to 190 billion pounds of new lending, it said.

“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,” the BoE said.