12 March 2020
Coronavirus - UK Economic Response
Bank of England - MPC cuts interest rates
In a swift move, not seen since the 2008 financial crisis, the Bank of England's Monetary Policy Committee (MPC) held a special meeting on 10 March 2020 and on 11 March announced a cut in interest rates, from 0.75% to 0.25%.
Following the spread of Covid-19, risky asset and commodity prices have fallen sharply, and government bond yields reached all-time lows, consistent with a marked deterioration in risk appetite and in the outlooks for global and UK growth. Indicators of financial market uncertainty have reached extreme levels.
Whilst the magnitude of the economic shock caused by Coronavirus is highly uncertain the economic impact is expected to be sharp but hopefully temporary. The following outcomes have been highlighted:
- Weaker activity in the UK.
- Temporary but significant disruption to supply chains.
- Cash flows challenged.
- Increased demand for short-term credit and working capital.
The Bank has stressed that these issues are most acute for smaller businesses.
The MPC's decision to cut interest rates is expected to achieve the following:
- Support business and consumer confidence in a period during which economic activity is being disrupted.
- Bolster the cash flows of businesses and households.
- Reduce the cost, and improve the availability, of finance.
The MPC has also voted unanimously for the Bank of England to introduce a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves.
When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates. In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants' stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs). Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.
The TFSME will:
- Help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses and households benefit from the MPC's actions.
- Provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets.
- Incentivise banks to provide credit to businesses and households to bridge through a period of economic disruption.
- Provide additional incentives for banks to support lending to SMEs that typically bear the brunt of contractions in the supply of credit during periods of heightened risk aversion and economic downturns.
Further to the cut in interest rates - the Bank's other two policy committees have announced a package of measures to help UK businesses and households bridge across the economic disruption that is likely to be associated with Covid-19. These measures are intended to keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm.
You can read about the measures taken by the Bank of England's Financial Policy Committee (FPC) and Prudential Regulation Committee (PRC) on the Bank of England website here.
The chancellor, Rishi Sunak, has made specific reference to dealing with Coronavirus in his first Budget. In his Budget statement Mr Sunak pledged £30 billion to help the economy respond to Coronavirus.
Three areas of support were mentioned to directly target the impacts of Coronavirus:
The Government will provide the NHS with whatever it needs during the Coronavirus outbreak. Mr Sunak said:
"Whatever extra resources our NHS needs to cope with Covid-19 - it will get... whatever it needs, whatever it costs."
2) Statutory Sick Pay (SSP)
Mr Sunak acknowledged that the safety-net was not strong enough for those that fall ill or can't work. Following on from the previously announced SSP from day 1 (for those employees that can avail of SSP) SSP will be now be available to those that are advised to self-isolate - even without symptoms. For the self-employed, benefits will be available from day 1 (as opposed to day 8).
Furthermore, a £500m "hardship fund" to be given to local authorities in England to help vulnerable people in their areas.
3) Support for business
For companies with fewer than 250 employees, the cost of SSP payments to employees of work due to Coronavirus (up to 14 days) will be refunded by Government in full.
The HMRC Time to Pay arrangements will be prepared for an increase in tax deferments.
A temporary Coronavirus Business Interruption Loan Scheme will be temporarily setup to assist with cash flow at affected small and medium-sized businesses.
Business rates will be abolished for some businesses. An earlier manifesto pledge, that small businesses in retail, leisure or hospitality sectors (those with a rateable value of less than £51,000) would benefit from an increase in their business rates retail discount to 50%, has been extended to a complete abolishment of business rates (applicable in England; Northern Ireland's budget is planned for 30 March).
Mr Sunak has also announced a cash grant of £3,000 for those businesses that are currently eligible for the small business rates relief.