By Canadian Press

In response to virus, Bank of England cuts main rate to 0.1%

Mar 19, 2020 | 9:52 AM

LONDON — The Bank of England slashed its main interest rate to 0.1%, the lowest level since its founding in 1694, and reactivated a bond-buying stimulus program in response to the economic shock of the coronavirus pandemic.

The bank’s nine-member Monetary Policy Committee said Thursday that the moves were designed “to meet the needs of U.K. businesses and households in dealing with the associated economic disruption.”

The interest rate cut comes just about a week after the central bank cut its rate from 0.75% to 0.25% at another emergency meeting.

Perhaps more important than the rate cut, the bank said it was relaunching its monetary stimulus program that it had first used during the global financial crisis a little more than a decade ago.

The Monetary Policy Committee, now under new Governor Andrew Bailey, unanimously decided to increase its purchase of mainly government bonds but also corporate bonds, by 200 billion pounds ($230 billion) to 645 billion pounds.

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The move effectively pumps new money into the economy to help it cope with the huge disruption of the coronavirus outbreak, which has seen the government impose a series of increasingly stringent restrictions on economic activity.

“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,” the committee said in a statement. “The role of the Bank of England is to help to meet the needs of U.K. businesses and households in dealing with the associated economic disruption.”

The decision to relaunch its bond-buying program comes less than a day after the European Central Bank ramped up its such program in the hope of keeping a lid on the borrowing rates of the 19 European Union countries that use the euro, particularly of highly indebted Italy and Greece.

The Bank of England, which also expanded a new funding scheme for small and medium-sized firms, has been working in concert with the British government to respond to the coronavirus outbreak, which many economists think will lead to a slump unseen since the 1930s.

“It is now clear that the prolonged impact of a shut-down to the economy, coupled with the large fall in demand and related uncertainty, will most likely lead to a severe downturn unless we see more drastic and decisive policy actions,” said Dr Ivan Petrella, Associate Professor of Economics at Warwick Business School.

The government, which has already announced a 350 billion-pound package of mainly loans to businesses and expanded sick-pay provision, is expected to announce more measures to support the economy over the coming days, notably to shore up the incomes of workers.

“This is most likely the area where the government will have to intervene in the coming weeks if it aims to prevent a wave of lay-offs,” said Petrella.

The bank’s moves helped shore up British share prices, with the FTSE 100 index up 0.4%.

Pan Pylas, The Associated Press