LONDON — The Bank of England slashed its key interest rate by half a percentage point to 0.25% on Wednesday, in an emergency response to the “economic shock” of the coronavirus outbreak.
The central bank said in a statement that the move, which was supported by all nine members of the Monetary Policy Committee, would “help support businesses and consumer confidence at a difficult time.”
The cut takes the main rate to the record low it stood at in the aftermath of Britain’s vote in June 2016 to leave the European Union. And it comes just hours before the British government is expected to announce its own package of measures to shore up the economy in the face of arguably the biggest economic shock since the global financial crisis 12 years ago.
The cut follows similar reductions from the U.S. Federal Reserve and the Bank of Canada. The European Central Bank is also expected to announce a package of stimulus measures on Thursday.
In contrast to Italy, the epicenter of Europe’s outbreak with 10,100 cases, Britain has only 373 confirmed cases of COVID-19 and six deaths. But the impact of the outbreak has already slammed European airlines, airports and travel-related businesses, as air passenger numbers sink rapidly and travelers avoid cruise ships. Many businesses in the U.K. depend on tourism.
The Bank of England said the effect of the new coronavirus on the British economy could be significant, with activity likely to “weaken materially” in the coming months. Growth projections have been slashed for all major economies around the world as the virus halts production and dents business and consumer confidence.
“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,” the bank said. “Such issues are likely to be most acute for smaller businesses.”
In addition to the rate cut, the bank announced a package of measures that it hopes will keep money flowing through the economy. It unveiled a new funding scheme that will focus particularly on small- and medium-sized firms and also slashed to zero from 1% the amount of capital that banks have to keep in reserve, a move that is designed to bolster lending.
It said its proposals were a “comprehensive and timely package of measures to help U.K. businesses and households bridge across the economic disruption that is likely to be associated with COVID-19.”
Mark Carney, who is leaving his post as governor at the bank next Monday, said the measures were designed together with the British Treasury.
“These measures will help keep firms in business and people in jobs,” he said.
Carney said the rate cut will support cash flow for businesses and households and support confidence in the economy at a time of “temporary but significant” disruptions in the supply chain.
The new funding scheme could make available 100 billion pounds to businesses, he said.
The impact of the measures could be amplified for being rolled out alongside the government’s new budget, experts said.
“Reacting to the stock market rout and developing economic shock from COVID-19, which has tipped major parts of the global economy into recession, U.K. policymakers are taking the necessary steps today to deliver a coordinated monetary and fiscal stimulus,” said Kallum Pickering, senior economist at Berenberg Bank.
And Rain Newton Smith, chief economist at the Confederation of British Industry, said the measures to support businesses facing credit and cash flow issues “could make a real difference in the weeks ahead.”
Treasury chief Rishi Sunak is expected to announce further measures later to support the flow of loans through the economy, which is already weighed down by uncertainty over Britain’s future trade relationship with the EU.
Business groups have urged Sunak to let firms defer tax payments and to back emergency loans for struggling enterprises. Unions have sought guarantees that self-employed and contract workers will get sick pay if they have to stay home.
The virus is starting to hit closer to the heart of the British government. On Tuesday, Nadine Dorries, a minister in the Department of Health, said she is self-isolating as she recovers from the virus.
The Times of London reported that Dorries first showed symptoms on Friday and had since worked in Parliament, held meetings with constituents and attended an International Women’s Day reception with British Prime Minister Boris Johnson.
