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Covid-19: Bank of England Cuts Rates to Support Economy

Covid-19: Bank of England Cuts Rates to Support Economy

The Bank of England has cut interest rates by 0.5 percent today after announcing emergency measures to bolster the economy by supporting bank lending as they try to encourage businesses to borrow more money and expand business activity.

Later today the government is set to reveal its plans for the first Budget of 2020 as tensions and concerns build as a result of the Covid-19 outbreak. Rishi Sunak, the Chancellor of the Exchequer, is scheduled to announce the fiscal plans in the House of Commons, shortly after taking over from the previous Chancellor Sajid Javid in February 2020 after he resigned.

Ben Zaranko, a Research Economist at the UK Institute for Fiscal Studies suggested that this year’s budget could be heavily focused on countering the impact of the coronavirus outbreak.

In an article entitled Levelling up: what might it mean for public spending? Published on March 9th, Mr. Zaranko wrote: ‘This may be a budget dominated by the coronavirus but the government’s priority to “level up” across the UK is still likely to be a theme. This promise has so far been rather light on details, but the ultimate goal of a ‘levelling up’ agenda would presumably be to reduce the disparities in productivity and earnings across the UK. Recent IFS research has documented these regional inequalities, showing for instance that in London both productivity and earnings are more than 30% higher than the national average, but that in Wales they are 15% lower.’

‘There is no single policy lever that can be pulled to reduce these disparities and address the complex underlying causes, and it could take years – or decades – for policies to have meaningful effects. For instance, one factor driving higher productivity in London is the fact that it has a more highly educated workforce than other parts of the country. 47% of working-age adults living in London are graduates, versus 24% in the North East. This is unlikely to change fast and for as long as this disparity remains, differences in earnings and productivity are also likely to remain.’

‘One thing that the government can exert control over in the immediate term, however, is public spending.’

Some areas of the budget have already been released, such as well over 500 billion pounds to be pumped into infrastructure including transport links, housing, and research over five years.

The United Kingdom is taking drastic action to jump-start a stalling economy as the coronavirus continues to spread causing widespread uncertainty, panic, and concern. The emergency interest rate cuts were announced by the Bank of England as the financial markets in London were opening for the day and just before the government’s scheduled publication and announcement of its fiscal plans.

The Bank of England published the following statement today on its decision to implement an emergency interest rate cut: ‘The front line of combatting the challenges of Covid-19 comprises the extraordinary efforts of NHS health professionals, carers, and volunteers across the country, as well as the exceptional support by the FCO to UK citizens abroad.’

‘The Bank of England’s role is to help UK businesses and households manage through an economic shock that could prove sharp and large but should be temporary. The Bank’s three policy committees are today announcing a comprehensive and timely package of measures to help UK businesses and households bridge across the economic disruption that is likely to be associated with Covid-19. These measures will help to keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm.’

‘At its special meeting ending on 10 March 2020, the Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25%.  The 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. The MPC 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. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.’

‘The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.’

 The impact of the Covid-19 outbreak appears to be getting worse as cases around the world increase day by day which is having a knock-on effect on investors and business activity as fears of a global economic downturn and faltering financial markets escalate.

The Bank of England’s decision comes after a similar measure was taken by the US Fed last week, which also cut interest rates in hopes of boosting economic activity in the face of the coronavirus outbreak.

The British pound fell by over 0.5 cents against the US greenback following the announcement of the emergency interest rate cut.

Why has the Bank of England reacted this way?

The decision to slash interest rates is part of a plan put forward by the Bank of England to bolster economic activity following the sheer impact the spread of the coronavirus has had on the markets, business investment, and consumer spending.

In addition to the rate cuts, the Bank of England also revealed a new measure to help spur lending between commercial banks and companies, especially businesses on the smaller side of the scale.

Having low-interest rates generally benefits businesses and individuals taking out a loan as opposed to those who have savings accounts. Commercial banks use the base rate of interest set by the country’s central bank as a benchmark rate.

Policymakers at the Bank of England have suggested that knocking the base rate down to 0.25 percent could open up an extra 190 billion pounds for lending.

Major tech companies including Google, Amazon, Microsoft, Twitter, and Facebook, have all started encouraging their employees to start working remotely from home to curb the spread of the virus.

Confirmed cases of the Covid-19 virus have risen to nearly 1,000, with Facebook and Amazon confirming that they have employees who have been diagnosed with coronavirus.