The Bank of England has reduced the base rate of interest from 0.75 per cent to 0.25 per cent in response to the threat that the coronavirus outbreak presents to the UK economy.
Plans have also been announced for a new lending programme for SMEs, who the bank fears could be most badly impacted by the likely economic disruption caused by the spread of the Covid-19 virus.
“These measures will help keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm,” the Bank said in a statement.
Outlining what it anticipates will happen in the coming weeks as a result of the virus situation, the Bank’s statement says: “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.”
The Bank held an unscheduled meeting of its Monetary Policy Committee (MPC) on March 10th and voted unanimously to reduce the base rate of interest for the UK by 50 basis points to 0.25 per cent.
Another vote saw the committee back the creation of what is being referred to as a term funding scheme, which is intended to help ensure that the reduction in interest rates transmits to the real economy and succeeds in making it cheaper for businesses and households to borrow money.
The scheme should also provide incentives to banks to provide credit to companies and households in ways that bolster their ability to successfully navigate what looks set to be a turbulent period for the British economy.
Banks will also be incentivised specifically to provide credit to SMEs, who the Bank points out “typically bear the brunt of contractions in the supply of credit during periods of heightened risk aversion and economic downturns”.
The Bank’s assessment is that the disruption caused by Covid-19 “could be sharp and large” but should also be temporary.
“Given the resilience of the core banking system, businesses and households should be able to rely on banks to meet their need for credit to bridge through a period of economic disruption,” it said in a statement following its emergency MPC meeting.