Bank of England Rate Cut 50bps to 0.25%

The Bank of England fired its big bazooka today with a 50bps cut to rates, but it’s really an appetizer for the main course later. This takes the Bank base rate back to its all-tome low at 0.25%. They’re loosening rules around capital buffers for banks and estimate it will be worth £290bn in extra funding. The key question is whether banks will simply lend more? It needs to come with genuine commitment – as we saw with the RBS (LON:RBS) announcements yesterday. 

The move seems to have been preceded by a weakening in sterling yesterday and GBP took a leg lower on the announcement. GBP/USD has retraced that in fairly short order and moved back to 1.29. FTSE futures moved higher but UK assets are looking more towards Rishi Sunak later.

Unlike the Fed, which shot its bolt early, this is clearly part of a major coordinated response to the coronavirus pandemic with a twin pronged monetary and fiscal package. It’s a smart decision to move ahead of the scheduled meeting and do this on Budget day as it maximises the impact of the cut by tying it to the fiscal package. In the US the Fed has cut but we’re still waiting on the White House and a Congress to do their bit. Britain is in the best position to respond to the economic impact of the coronavirus. Heathrow has just said its numbers are down 4.8% - the damage is going to be significant and a rate cut is not enough.

Rate cuts alone are not amounting to much these days but with the term funding scheme measures and counter cyclical buffer being reduced to 0% it ought to help the transmission to businesses. We are seeing the BoE and Treasury clearly leaning on banks to ease conditions for businesses and households - as evidenced by the RBS move yesterday. There will be a major support package in the Budget today. The BoE’s cut is just a small portion of the response – it's not enough to counter the damage alone so we are now looking at a significant stimulus from the government today. 

What the BoE said 

Bank has seen a marked deterioration in risk appetite 

Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months.  

Bank Rate cut 50bps to 0.25% 

new Term Funding scheme for SMEs 

No extra QE 

reduced the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect.  The rate had been 1% and had been due to reach 2% by December 2020. 

Stern warning not to raise bonuses or dividend

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Written By: Markets.com