UK shoots with both barrels: cuts rates and increases budget spending


By David Milliken and Paul Sandle

LONDON, Mar 11 (Reuters) – The Bank of England cut its interest rates by half a percentage point on Wednesday and announced initiatives to stimulate bank lending just hours before the government reveals budgets that will include significant spending to avoid a recession caused by the coronavirus outbreak.

In a two-band stimulus plan, the Bank of England announced an emergency rate cut unanimously agreed just before markets opened in London and Prime Minister Boris Johnson’s Executive announced its budget plans starting noon.

Mark Carney’s latest move as governor, which returns the benchmark interest rate to a record low of 0.25%, comes at a time when COVID-19, a flu-like infection caused by the coronavirus, It is spreading rapidly, fueling fears of a global recession and disrupting markets.

“The role of the Bank of England is to help UK businesses and households overcome an economic crisis that could be large and acute, but should be temporary,” Carney told reporters after announcing the first rate cut. since August 2016.

The cut comes after the adoption of a similar measure by the United States Federal Reserve last week, constituting the first such action that has taken place outside the calendar of meetings scheduled on the British central bank’s agenda since the crisis. financial statement for 2008. The bank interest rate has returned to the record low it reached after the 2016 Brexit referendum.

“These measures will help keep companies and people in jobs, and prevent a temporary outage from causing more lasting economic harm,” said Carney, who appeared alongside his successor Andrew Bailey.

British Finance Minister Rishi Sunak will present his first budget shortly after 12:30 GMT, which is expected to include more funding for healthcare in the fight against the coronavirus, as well as increased economic stimulus.

The British pound sank briefly against the dollar by almost a penny after the news broke, but soon recovered and was trading at around $ 1,293 at 0908 GMT, the same level it was before the Bank of England cut rates of interest. Yields on British long-term government debt rose sharply.

“Although the magnitude of COVID-19’s economic shock is highly uncertain, activity is likely to weaken markedly in the UK in the coming months,” the BoE said.

“The Bank will take all necessary measures to support the UK economy and financial system.”

NO MORE QUANTITATIVE EXPANSION FOR NOW

The Bank of England did not announce new debt purchases (referred to as quantitative easing or QE), but reduced its countercyclical capital buffer for banks to zero and launched a new plan to encourage small business lending, both measures to keep loans flowing.

The Bank of England (BoE) said it would allow banks to release a special capital reserve, known as a countercyclical capital reserve, so they can continue to lend to households and businesses during the coronavirus epidemic. The release of this reserve will open a floodgate of up to £ 190bn of bank loans to businesses, equivalent to 13 times the banks’ net loan to businesses in 2019, the BoE said.

“Like the Federal Reserve measure we saw earlier, it’s about making sure you’re ahead of the game,” said Vicky Clarke, economist at Investec. “They haven’t done anything on the QE front, so there is still a chance to pull that level if necessary.”

The US Federal Reserve and the Bank of Canada cut rates last week, and the European Central Bank is expected to take action on Thursday.

“Temporary but significant interruptions in supply chains and weaker activity could pose a challenge to cash flows and increase the demand for short-term credit from households and from companies’ working capital,” said the Bank. from England.

JPMorgan said the only surprise was that there was no guidance on the direction of the next decisions the Bank of England could make.

“The only slight surprise is that there is no guidance on the next step in monetary policy,” JPMorgan said in a note to its clients.

(Reports by David Milliken and Kate Holton. Edited in Spanish by Tomás Cobos)