Bank of England Cuts Rates and Expands QE

Second rate cut in a week takes interest rates to a record low of 0.1% and comes as governments across the globe step up their response to the coronavirus crisis 

James Gard 19 March, 2020 | 3:31PM
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The Bank of England has cut interest rates to a new record low of 0.1% as governments across the world scramble to come up with an economic response to the coronavirus outbreak.

Announcing the decision, the Bank stuck to the line last week from outgoing Governor Mark Carney that the economic disruption from coronavirus will be shortlived: “The spread of Covid-19 and the measures being taken to contain the virus will result in an economic shock that could be sharp and large, but should be temporary.”

New Governor Andrew Bailey, who only started his new job on Monday, described the current crisis as an “economic emergency”.

The Bank also expanded its money printing operations or quantitative easing, a legacy of the financial crisis, from £435 billion to £635 billion, which means it will step up the buying of UK Government Gilts and corporate bonds.

The move will be a boon for borrowers on variable rate mortgages or trackers but will heap more misery on savers. “There is little the Bank of England can actually do to support the immediate crisis as interest rates are already at record low levels and any cuts now will take time to feed into the economy,” says Adrian Lowcock, head of personal investing at Willis Owen.

More QE to Help the Economy

Analysts said the expansion of QE is the most significant part of today's announcement. The Bank said it had been prompted to act by significant moves in the bond market in recent days. Bond prices have collapsed this week – the opposite of what should happen when equity markets are collapsing – as fixed-income investors worry about how governments will fund all this extra spending. More bonds in issue means lower prices for these instruments and that triggered a flight to cash on Wednesday as investors sought out the most liquid assets.

“Conditions in the UK gilt market have deteriorated as investors have sought shorter-dated instruments that are closer substitutes for highly liquid central bank reserves,” the Bank said. 

JPMorgan's chief market strategist Karen Ward added: “The support to the economy and health system will require vastly higher government borrowing. The central bank showing willing to buy government debt will ensure the market can absorb this additional issuance without undue stress."

Central Banks Take Action

This latest cut comes just a week after the Bank knocked 50 basis points off interest rates to 0.25%, a co-ordinated action with the UK Government, which launched a £175 billion spending plan to combat the enfolding economic crisis in its Budget, announced the same day.

The US Federal Reserve cut interest rates on Sunday to between 0% and 0.25%, having made a 100 basis point cut the previous week. But in an extraordinary move, the US Government has moved beyond monetary stimulus by proposing to give every American household $1,000, in what is known as “helicopter money”.

On Wednesday, the European Central Bank launched an emergency package worth €750 billion; new ECB President Christine Lagarde said: “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro.” The ECB has less room to manoeuvre in terms of interest rates than either the Federal Reserve or Bank of England coming into this crisis: its main refinancing rate has been 0% for a while and its overnight deposit rate is -0.40%, which discourages European banks from holding cash with the central bank. In contrast, the Bank of England came into the crisis with interest rates at 0.75% and the Fed came into 2020 with rates between 1.50% and 1.75%.

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James Gard  is content editor for Morningstar.co.uk