The Bank of England announced a “timely and powerful” package of measures to help UK banks, businesses and households deal with the economic disruptions from the coronavirus outbreak.
The measures include a rare unscheduled rate cut to historical lows, the offer of cheap funding to banks, lowering banks’ capital buffers and expectations for banks to not increase dividends. Instead, quantitative easing — the bank’s purchase of government bonds — was left unchanged.
The BoE package is aimed at helping to ensure lending continues during the crisis and to mitigate any longer-lasting effects of the virus on jobs, growth and the UK economy. It was announced on the day of the Budget.
“Policymakers are clearly concerned about the risks ahead,” said Kallum Pickering, senior economist at Berenberg, the investment bank. “The joint action reflects the intention to send a big message that policymakers are prepared to take aggressive and pre-emptive steps to support the economy.”
These are the key measures in detail:
Bank rate cut
The Monetary Policy Committee voted unanimously to reduce its benchmark interest rate by 50 basis points to 0.25 per cent, equalling its lowest levelsince the second world war.
Some economists argued that given its already low level, a rate cut might not be effective in the short term.
“Cutting borrowing costs by a few basis points from here is not going to be enough to embolden a company to open a new factory and hire workers, nor will it encourage consumers to buy from shops or inspire them to book a holiday,” said Dean Turner, economist at UBS Global Wealth Management.
However, a rate cut “will help to support confidence in the markets, which has taken a severe knock over the past few days”, said Tej Parikh, chief economist at the Institute of Directors, a business organisation.
It will also help reduce costs for a third of households and half of businesses that have floating rate mortgages, according to Mark Carney, outgoing governor at the BoE.
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The last time rates were cut outside the scheduled timetable of MPC meetings was during the 2008 financial crisis.
“The unscheduled nature of the announcement highlights the bank’s eagerness to be on the front foot and is taken by investors as a commitment to further easing as necessary,” said Edward Park, deputy chief investment officer at Brooks Macdonald, an investment management company.
Cheap funding
The BoE reintroduced a 2016 measure to offer banks four years of cheap funding in order to ensure that they continue lending during the coronavirus crisis.
The Term Funding scheme for Small and Medium-sized Enterprises (TFSME) offers funding at interest rates at, or very close to, the benchmark rate. It is expected to last one year and to provide in excess of £100bn in funding.
The measure will provide banks with “a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets”, the BoE said.
It also provides additional incentives for banks to support lending to small and medium businesses that tend to bear the brunt of supply credit contractions during economic downturns.
Easing of capital requirements
The BoE also lowered the banks’ requirements to hold capital buffers so “the buffer can be used to support the economy”, said Andrew Bailey, who becomes the BoE governor on March 16.
The Financial Policy Committee reduced the UK countercyclical capital buffer rate to 0 per cent of banks’ exposures to UK borrowers with immediate effect. This is down from the current 1 per cent and reverses an expected rise to 2 per cent later this year.
The BoE estimates that the release of the countercyclical capital buffer will support up to £190bn of bank lending to businesses, which is equivalent to 13 times banks’ net lending to businesses in 2019.
“This is a very very large number,” said Mr Carney, adding that the reduction of the countercyclical capital buffer rate would “release a huge amount of lending capacity”.
Together with the TFSME, “banks should not face obstacles to supplying credit to the UK economy”, the BoE said.
Dividends freeze
The last measure came from the BoE’s Prudential Regulation Authority, which laid out an expectation that banks should not use any funds freed up by the other measures to increase dividends or bonuses.
This is a call for banks to use the increased funding to direct money to businesses that need cash to overcome the period of disruption caused by coronavirus, rather than going into the pockets of investors or bank employees.
James Smith, economist at ING, the investment bank, said that while the markets’ focus was on the rate cut “the more important measures are the ones policymakers unveiled to keep credit flowing to businesses affected by the virus”.
The BoE measures “won’t prevent the economy stagnating or contracting in Q2 and Q3”, said Paul Dales, chief UK economist at Capital Economics, a consultancy, “but they will help to ensure that the economy can bounce back later this year and in 2021 once the virus has peaked”.
