'Shock' Bank of England interest rate cut prompts wide range of industry comments
A range of comments has greeted the news on the Bank of England’s announcement of an unexpected interest rate cut of 50 basis points down to 0.25 per cent, driven by the effects of the coronavirus epidemic.
Commenting on the likely effect on savers, particularly with the UK Budget later on today, Laura Suter, personal finance analyst at investment platform AJ Bell, says: “Savers who have already seen a swathe of cuts to the interest they get on their cash are likely to be hit further. The top rate you can get on an easy-access cash account at the moment is 1.3 per cent, far below the current rate of inflation, and this now looks ripe for another cut following today’s move. Cash savers will feel they’ve been dealt another blow after years of being clobbered with below-inflation rates – meaning they are losing money in real terms.
“However, the potential cut to interest on debt could come at a crucial time for some. One in eight adults have no savings at all and 45 per cent of the population have less than GBP2,000 in cash - so if Coronavirus starts to hit people’s earnings, we could see a big rise in the level of debt people have to take on just to pay the bills. If the rate people are paying on this debt falls it could provide some support at the edges.”
Looking at the effect on businesses, Suter says: “This was a swift move from the Bank of England in an attempt to support the UK economy amid the Coronavirus turmoil, but the unanimous vote to slash rates back to the lowest point in history will shock some at how quickly it happened. The move, which takes rates lower than in the financial crisis, is the first unscheduled interest rate change from the Bank of England since the banking crisis 12 years ago. The cut to 0.25 per cent also leaves minimal ability to slash rates further in the future.
“The move is coupled with support for businesses, with a new term funding scheme and relaxing bank credit rules to get more help to businesses, in an attempt to help small companies through the disruption, slower sales and potential shutdowns that may be caused by Coronavirus. This gives an indication of what is to come in Rishi Sunak’s first Budget later today, with further help for businesses and even a business rate holiday suggested as a helping hand for companies.
“However, while the package of measures will help businesses, they will be light relief for individuals, who are unlikely to see a big impact from the cuts. Mortgage rates are already near record lows and it’s unlikely providers will be able to cut them much more – let alone pass on the entire rate cut. The exception is those on tracker rates, who will see a near-immediate effect on their monthly repayments.
Stuart Clark, portfolio manager at Quilter Investors comments in the light of the upcoming change to the Governorship of the Bank of England: “With Mark Carney almost out of the door of the Bank of England, he has given the market a leaving present of an interest rate cut as the threat of the coronavirus looms large. The rate cut by the BoE is hugely significant given they have chosen to do it on Budget day. Investors will be asking what do they know that we don’t, and will it be a co-ordinated, and potentially political, effort with fiscal measures due to be announced later.
“We know that the government will be announcing emergency measures today to help prop up the economy from the impact of the coronavirus, so this move could be to allow these to be introduced through increased government borrowing.
“However, as in the US, this move is a fairly blunt tool trying to keep overall financial conditions at pre-virus levels and won’t help resolve the virus issue itself. However, this cut might just give a small lifeline to those companies and people that are struggling with cash flow and debt payments in light of reduced activity levels.
“This is a situation that the Bank of England will need to keep a close eye on as more targeted measures would likely be increasingly effective for the economy if the virus is to take hold here like it has in Italy and China. Italy only yesterday introduced debt interest holidays for mortgage holders, something a handful of UK banks followed suit with, so there are further initiatives the BoE can draw on.
“Finally, this will heap further pressure on Andrew Bailey as he takes up the post next week, with little wiggle room in interest rates, he may need to get inventive if global growth collapses and economy stagnates further.”
Anna Stupnytska, Head of Global Macro, Fidelity International comments on the rate change in the context of coronavirus: “In an emergency move, the Bank of England (BoE) has cut interest rates by 50 basis points, following the Federal Reserve’s move last week. In addition, the Bank announced a new funding scheme aimed at supporting small and medium-sized enterprises (SMEs) exposed to the coronavirus shock.
“This is a decisive move by policymakers who are scrambling to address the potentially wide-ranging fallout on the economy as the virus continues to spread rapidly.
“The cut also comes earlier than expected - a few hours before the new Chancellor Rishi Sunak is scheduled to unveil his first budget which is likely to focus on fiscal measures aimed at helping the economy navigate the shock.
“While the action from the BoE and the Treasury on the same day signals the policymakers’ preparedness to respond, the high degree of uncertainty around the extent of the coronavirus spread and its economic impact makes it difficult to gauge whether the new policy measures are going to be sufficient to avert a recession this year.”
Adam Vettese, an analyst at multi-asset investment platform eToro, believes that the rate cut might be temporary: "This cut is unexpected and takes the UK's base rate to just 0.25 per cent, back to its lowest level in history.
"In the short term this could spook markets, showing as it does the severity of the coronavirus epidemic, especially as the Bank also said it would relax capital rules to free up billions of pounds to provide extra borrowing power to the economy.
"Looking ahead, we do expect this to be a temporary measure that is unwound as soon as possible, as with the previous emergency cut."