Bank of England cuts interest rates from 0.25 per cent to 0.1 per cent

19 March 2020, 16:20

The central bank has cut interest rates to a historic low
The central bank has cut interest rates to a historic low. Picture: PA

By Matt Drake

The Bank of England has cut its base rate to a record low of 0.1 per cent as it warns the coronavirus outbreak will cause a "sharp and large" economic shock.

The Bank of England's Monetary Policy Committee (MPC) voted unanimously in favour of the rate cut which is the lowest rate since its creation in 1694.

In a statement, the central bank said: "Over recent days, and in common with a number of other advanced economy bond markets, conditions in the UK gilt market have deteriorated as investors have sought shorter-dated instruments that are closer substitutes for highly liquid central bank reserves.

"At its special meeting on 19 March, the MPC judged that a further package of measures was warranted to meet its statutory objectives.

"It therefore voted unanimously to increase the Bank of England's holdings of UK government bonds and sterling non-financial investment-grade corporate bonds by £200 billion to a total of £645 billion, financed by the issuance of central bank reserves, and to reduce Bank Rate by 15 basis points to 0.1%."

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The Bank of England said that financial conditions in the UK and globally have "tightened" in recent days due to weaker market conditions.

The emergency meeting came less than a week before the MPC's next scheduled meeting on Wednesday March 25. The BoE cut the interest rate to 0.25% from 0.75% just last week.

According to the central bank, the spread of Covid-19 and measures being taken to contain the virus will result in an economic shock that could be "sharp and large, but should be temporary".

The pound was quoted at USD1.1666 on Thursday afternoon, sharply down from USD1.1817 on Wednesday afternoon, trading at fresh 35-year lows as investors rushed to liquid assets like the greenback.

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Bannockburn Global Forex said: "The dollar's strength is, in effect, a powerful short-covering rally. It was used to fund a great part of the global circuit of capital. The circuit of capital is in reverse now, and the funding currency is being bought back. The dollar's strength is a function of the sell-off of other assets."

Against the euro, sterling fell to EUR1.0780 from EUR1.0842.

The pound's woes were compounded by fears of a partial lockdown across London. Emergency legislation to tackle the coronavirus outbreak will be published in parliament after UK Prime Minister Boris Johnson announced the closure of schools and cancellation of exams.

The legislation will be presented as the Army prepares to help out in the crisis and London faces the prospect of greater restrictions, with the capital suffering a faster spread of Covid-19.