By Geoffrey Smith
Investing.com -- The Bank of England cut its key rate by 50 basis points to 0.25%, aiming to support an economy that is set to be hurt by fallout of the spreading coronavirus.
The Bank also said its Monetary Policy Committee also voted to introduce a new term funding scheme with additional incentives for small and medium-sized enterprises. It said past experience with such lending schemes suggested the amount injected through this channel could be over 100 billion pounds.
The pound fell to $1.2873 from $1.2937 immediately before the announcement. The 10-Year U.K. Gilt yield rose to 0.28% from 0.24%, while the FTSE 100 future rose to 6,021 points, from 5,927 points immediately beforehand.
In addition, the BoE's Financial Policy Committee, which is responsible for macro-prudential regulation of the banking system, said it will waive the existing Countercyclical Capital Buffer of 1%, aiming to avoid a credit squeeze to the real economy. The move will allow banks to operate temporarily with lower capital ratios, reducing the need for them to call in riskier loans or restrict new lending. The Bank expects to the CCyB to stay at 0% for at least 12 months, while any fresh increases would come into effect only with a 12-month time lag, that is, no earlier than March 2022.
"The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses," the Bank said. "That is equivalent to 13 times banks’ net lending to businesses in 2019. "Together with the TFSME, this means that banks should not face obstacles to supplying credit to the UK economy and to meeting the needs of businesses and households through temporary disruption."
The BoE made no changes to its asset purchase program, however.
The actions come on the same day that Chancellor of the Exchequer Rishi Sunak is due to present the new government's first annual budget statement. Sunak is expected to announce a substantial increase in public borrowing, although much of that will be unrelated to Covid-19 factors.
“The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance,” the Bank said in a statement.