UK cuts main interest rate from 0.75% to 0.25% due to COVID-19 fears

File photo of a general view of the Bank of England. /VCG

The Bank of England (BoE) on Wednesday announced a cut from 0.75 percent to 0.25 percent to its interest rate, creating the lowest borrowing costs in the history of UK.

The BoE has also announced it will free up billions of pounds to support small- and medium-sized companies and implement new steps to help commercial banks lend more money to firms.

The decision came after a sixth person died from the coronavirus in UK, which has reported a total of 382 COVID-19 cases so far.

In a statement, the BoE said that at a meeting Tuesday: "The Monetary Policy Committee voted unanimously to reduce Bank Rate by 50 basis points to 0.25 percent."

The reduction from 0.75 percent heads a "package of measures to help UK businesses and households bridge across the economic disruption that is likely to be associated with COVID-19," the central bank added.

"Although the magnitude of the economic shock from COVID-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months," the BoE said in its statement.

"Temporary, but significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for short-term credit from households and for working capital from companies.

"Such issues are likely to be most acute for smaller businesses. This economic shock will affect both demand and supply in the economy," the bank warned.

More measures support businesses

BoE policymakers, led by outgoing governor Mark Carney, also voted to allow retail banks in Britain provide cheap lending to businesses, aided by central bank reserves.

The BoE told also banks on Wednesday they can tap one of their capital buffers to maintain lending during the coronavirus epidemic, but warned they must not use the cash for bumping up bonuses or dividends.

Insurers were also offered relief on the long-term phase-in of new capital rules.

The BoE's Financial Policy Committee (FPC) said that for banks it was cutting the so-called counter cyclical capital buffer (CCYB) to 0 percent, reversing a decision last year to raise it from 1 percent to 2 percent by the end of 2020.

The release of the buffer will support up to 190 billion pounds of bank lending to businesses, equivalent to 13 times banks' net lending to businesses in 2019, the BoE said.

"The FPC expects to maintain the 0 percent rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest," the BoE said in a statement.

"Although the disruption arising from COVID-19 could be sharp and large, it should be temporary."

The BoE's Prudential Regulation Authority, which supervises banks, said it expects lenders not to increase dividends or bonuses in response to releasing the CCYB.

"Such restrictions are consistent with the overarching aim of these buffers, which is to enable banks to continue to support the real economy and avoid amplifying a system-wide crisis," the Prudential Regulation Authority of the BoE said.

Any decision taken by banks regarding bonuses must be "consistent with the maintenance of a sound capital base", it added.

(With input from AFP and Reuters)