Coronavirus: UK interest rates slashed again in emergency move

Bank of England

The Bank of England has cut interest rates again in an emergency move as it tries to support the UK economy in the face of the coronavirus pandemic.

It is the second cut in interest rates in just over a week, bringing them down to 0.1% from 0.25%.

Interest rates are now at their lowest level in history.

The Bank said it would also increase its holdings of UK government and corporate bonds by £200bn with an effort to lower the cost of borrowing.

It’s a dramatic move by Andrew Bailey who only took over from Mark Carney as Bank of England governor on Monday.

Last week, the Bank announced a 0.5% cut in rates to 0.25% and a package of of measures to help businesses and individuals cope with the economic damage caused by the virus.

The move coincided with additional measures announced by Chancellor Rishi Sunak in the Budget.

However, the Bank said the measures it had taken so far were not going to be enough, and believed “a further package of measures was warranted”.

“The spread of Covid-19 and the measures being taken to contain the virus will result in an economic shock that could be sharp and large, but should be temporary,” it added.

International investors are engaged in a dash for cash and specifically dollars. So they’re ditching assets such as UK government gilts, the “I owe you” notes the government hands over to private investors willing to lend it money.

As the gilts are sold, the price drops and the yield – the effective interest rate compared to the price – rises. What that means is the cost of borrowing to private investors as well as to the government rises – just when the Bank of England wants it to fall and the government is about to borrow huge sums.

The Bank of England’s plan to buy £200bn more bonds is meant to fight that effect.

‘Lowest possible’

The fresh rate cut takes interest rates to the lowest it can feasibly go, said Jeremy Thomson-Cook, chief economist at payments company Equals Group.

“Lower rates and additional quantitative easing can keep markets satisfied and borrowing costs for both businesses and the government down but unless money is forced into the hands of small businesses soon, then it will be for nothing; they are the ones laying off staff due to a liquidity shock,” he added.