The central bank said the move would “help support businesses and consumer confidence at a difficult time.” The cut took the main rate to a record low, last reached after Britain's June 2016 vote to leave the European Union. It came just hours before the British government was expected to announce its own package of measures to shore up the economy against arguably the biggest economic shock since the global financial crisis 12 years ago.
The cut follows similar reductions from the U.S. Federal Reserve and the Bank of Canada. The European Central Bank is also expected to announce a package of stimulus measures on Thursday. In contrast to Italy, the epicenter of Europe's outbreak with 10,100 cases, Britain has only 373 confirmed cases of COVID-19 and six deaths. But the outbreak has already affected the U.K. economy, hitting tourism and clogging up the global supply chains that many modern businesses rely on.
The Bank of England said the British economy, already weighed down by uncertainty about the U.K.'s future relationship with the European Union, would likely “weaken materially” in coming months due to the virus outbreak.
Growth projections have been slashed for all major world economies as the virus halts production and dents business and consumer confidence. Global stock markets have suffered their biggest daily losses since the height of the global financial crisis in 2008.
Outgoing Bank of England Governor Mark Carney said the economic impact of the virus outbreak would be “temporary but significant," especially on smaller businesses, which may struggle with cash flow.
In addition to the rate cut, the bank announced a package of measures it hopes will keep money flowing through the economy. A new funding scheme will focus particularly on small- and medium-sized firms and the bank also slashed to zero from 1% the amount of capital that banks have to keep in reserve, a move designed to bolster lending.
Carney said the measures — designed together with the British Treasury — could make hundreds of billions of pounds (dollars) available to firms and financial institutions. “These measures will help keep firms in business and people in jobs,” Carney told a press briefing. “This is a big, big, package."
Andrew Bailey, who succeeds Carney as governor on Monday, said the bank could do more in coming weeks if needed, including cutting its main interest rate further. The bank's rate-setting panel is due to meet again on March 26.
He downplayed concerns that the current crisis could end up as damaging economically as the global financial crisis. “There is no reason of this shock to turn into the experience of 2008 and a lost decade in economies if we handle it well," he said.
Kallum Pickering, senior economist at Berenberg Bank, said "U.K. policymakers are taking the necessary steps today to deliver a coordinated monetary and fiscal stimulus." And Rain Newton Smith, chief economist at the Confederation of British Industry, said the measures to support businesses facing credit and cash flow issues “could make a real difference in the weeks ahead."
The emergency measures overshadowed the government’s annual budget, set to be announced later Wednesday by Treasury chief Rishi Sunak. Sunak is expected to announce further measures to support the flow of loans through the economy.
Business groups have urged Sunak to let firms defer tax payments and to back emergency loans for struggling enterprises. Unions have sought guarantees that self-employed and contract workers will get sick pay if they have to stay home.
The government is also expected to loosen public purse strings after a decade of austerity and invest billions in large-scale infrastructure projects designed to boost the economy in poorer parts of the country.
As Sunak prepared to present his budget to hundreds of lawmakers in the cramped House of Commons chamber, the new coronavirus moved closer to the heart of the British government. Nadine Dorries, a minister in the Department of Health, said she was self-isolating as she recovers from the virus. Health officials were tracing those who had been in contact with Dorries over the past week, when she worked in Parliament, held meetings with constituents and attended an International Women's Day reception with the prime minister.
Parliamentary officials said that there were no plans to close Parliament, where thousands of people work in an aging, crowded complex of buildings.
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