COVID-19: UK interest rates hit lowest ever level

In a further move to support the UK economy in the face of the coronavirus pandemic, the Bank of England has cut interest rates for the second time in just over a week, down from 0.25% to just 0.1%.

Interest rates are now at the lowest ever in the Bank’s 325-year history, which said it would also increase its holdings of UK government and corporate bonds by £200bn with an effort to lower the cost of borrowing.

Last week, the Bank announced a 0.5% cut in rates to 0.25% in a move that coincided with measures announced by Chancellor Rishi Sunak in the Budget to help businesses and individuals cope with the economic damage caused by the virus.

‘an economic shock that could be sharp and large, but should be temporary’

The latest dramatic move by Andrew Bailey, who only took over from Mark Carney as Bank of England governor on Monday, comes after 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.

The cost of borrowing to private investors, as well as to the government, has risen as international investors cashed in UK gilts in a move to free up cash – particularly dollars; as the gilts are sold, the price drops and the yield – the effective interest rate compared to the price – rises.

This comes at just the time the Bank of England wants it to fall as the government is about to borrow huge sums; the Bank of England’s plan to buy £200bn more bonds is aimed at fighting that effect.

Rock Bottom

Jeremy Thomson-Cook, chief economist at payments company Equals Group, told the BBC the fresh rate cut takes interest rates to the lowest they can feasibly go:

‘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 said.

Karen Ward, chief European market strategist at JPMorgan Asset Management, said: ‘The support to the economy and health system will require vastly higher government borrowing. The central bank showing willing to buy government debt will ensure the market can absorb this additional issuance without undue stress.’