Rate cut: Emergency joined up thinking to save the economy

Unprecedented is a word we use too casually. But it’s safe to say that today’s emergency action by the UK authorities to slash interest rates and provide £100bn of extra funding for small businesses and households was just that.

In a rare display of solidarity between the authorities, the Bank of England announced the cut in the base rate by 50 basis points to 0.25%  hours before the new Chancellor, Rishi Sunak, announced extra stimulus measures in the Budget to protect against the worst impact of the virus epidemic.

The Chancellor is also planning emergency action to bolster the economy, particularly the country’s six million SMEs, which are already showing the squeeze which the Covid-19 virus outbreak is having on both spending and demand.

It’s a unusual example of joined up thinking from both ends of the policy spectrum, fiscal and monetary policy. And rare to see such unity from Westminster and the City. It shows just how worried the government is by the impact that Covid-19 is having on countries around the world and the potential for greater disruption in the UK.

Of far more importance than the interest rate cut, was the Bank of England’s plan to to provide – at very close to the new Bank rate of 0.25% – a four-year loan scheme for small businesses to access cash via banks over the next 12 months to tide them over the next few months and to bolster them from the worst effects of the epidemic.

What is critical, though, is that the high street banks are forced to keep their loans to small businesses at the lower rates.

In what may be his last appearance as Governor, Mark Carney also revealed that the Bank’s Financial Policy Committee, which identifies and acts on potential risks in the financial system, is bringing down what is known as the counter-cyclical capital buffer for banks to zero from 1%. This should give the banks the firepower to boost lending even further, by up to £190bn.

Capital buffers – the amount banks must hold in reserve – were tightened up after the Great Crash of 2008 and the fact they are being loosened is another clear indication of the urgency of the situation.

The situation was worrying before Coronavirus took off. New figures from the ONS which showed activity among services business has not rebounded as surveys had implied will have been taken on board by the emergency FPC meeting this morning.

The latest January GDP data is weak, prompting some economists to downgrade forecasts for this UK quarter on quarter growth to just 0.1% from 0.3%.

Industrial production was also down, but that was partly explained by the warm weather. Manufacturing, however, rose only to 0.2%.

Central bankers are usually cautious in their approach to policy, preferring the softly softly approach. That’s why Carney saying that the measures were designed for “maximum impact” – or the big bazooka approach coming on the same day as the Budget – is so novel for the UK. (The big bazooka was the name given to the policy boost from former ECB chairman, Mario Draghi, after the financial crash to ‘do what it takes’ to prop up the eurozone.

Unprecedented times call for unprecedented action.