This is extraordinary, unprecedented economic shock therapy – interest rates as low as they've ever been for hundreds of years. The fact the Bank feels the need to do this shows the level of seismic coronavirus tremors running through the nation's finances. The primary aim is economic stimulus. Reducing interest rates is an encouragement to spend and invest – it makes borrowing cheaper, and saving less attractive. And that's what they want – more money flowing through the economy.
The Bank of England has made another shock Bank Rate cut, just eight days after it made an emergency rate cut to 0.25% in response to the economic pressure of the coronavirus outbreak. The Monetary Policy Committee held an emergency meeting on 19th March and unanimously voted to cut the rate to a historic low of 0.1%.
Another Friday Briefing, another record-breaking low reached by global stockmarkets. Last week’s briefing referred to consumers stockpiling soap, beans and toilet rolls as they were left unsure how to react to the continued spread of the coronavirus. While many asset managers seized the opportunity to buy the market dips – citing short-term sentiment-led volatility as the best possible time to top up holdings – there was nevertheless a belief that economic activity will remain muted regardless of central bank activity. After all, what use is printing money and cutting interest rates when people are unable to visit shops and use services?
This week, however, the team at Investment Week has noticed the rhetoric has become more sombre. The words “inevitable” and “recession” have been infiltrating our inbox at an increasing pace. Wednesday’s Budget also suggested that the UK needs to act and act fast in order to keep the economy above water, with Chancellor Rishi Sunak committing more than £30bn to a dramatic fiscal stimulus package in a bid to tackle the impact of Covid-19, including a £2bn cash injection into small businesses and a £3.5bn “emergency response” fund. As Quilter Cheviot’s head of fixed interest research Richard Carter said, “had these announcements been made by a Labour Chancellor, there would probably have been howls of protest from currency and gilt markets”.
The Bank of England's Monetary Policy Committee have today made the unscheduled decision to cut the base rate by 0.5%. The decision, which falls outside of their normal announcement schedule and was made unanimously by the committee, has been made in response to the economic threat of Covid-19. The move is one of three measures taken by the Bank's policy committees during special meetings to mitigate the economic harm caused by the virus, which also includes providing a boost to funding for SMEs and reducing the capital buffer banks are required to maintain. Despite the measures put in place, the Bank says it remains confident that the UK economy can withstand the economic pressures of Covid-19, and notes that the current situation 'should have less of an impact on the core banking system than recent stress tests run by the Bank have shown the system can withstand'.
Millions of savers are to be hit by a series of interest rate reductions announced by the Treasury-backed savings giant NS&I. The changes would take effect from May. They include making the premium bonds prize fund rate less generous. It means, for example, that there will be five £100,000 prizes up for grabs in the May draw, down from six in February. And there will be around 13,448 £100 prizes on offer in May, down from 27,221 in February, NS&I said.