Policymakers have reduced rates to 0.25 percent from 0.75 percent, taking borrowing costs back down to the lowest level in history.
The BoE said economic activity is likely to weak material over the coming months, and significant disruption to supply chains could challenge cash flows.
But the bank added major UK financial institutions are well prepared to withstand any potential financial disruption.
The BoE said: “Indicators of financial market uncertainty have reached extreme levels.
“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.
“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 of England has slashed interest rates to 0.25 percent amid coronavirus fears
In its statement, the Bank said its role is to help help UK businesses and households manage through an economic shock from coronavirus “that could prove sharp and large, but should be temporary”.
It said the dramatic cut in interest rates is part of a “comprehensive and timely package of measures to help UK businesses and households bridge across the economic disruption that is likely to be associated with Covid-19.
The BoE added: “These measures will help to keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm. “
The bank said the rate cut “will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance”.
The BoE has also introduced a new term funding scheme for small businesses, offering four-year funding over the next 12 months.
The decision to cut interest rates was taken at a special meeting of the Monetary Policy Committee on Tuesday, with the vote to cut the bank rate by 50 basis points to 0.25 percent being unanimous.
The cut was the first move to take place outside the BoE’s normal schedule since the financial crisis in 2008, and takes rates the the record low they reached after the Brexit referendum in June 2016.
Incoming BoE Governor Andrew Bailey, who is replacing Mark Carney, had suggested there should be coordinated action from banks.
But following this news, the pound immediately plummeted more than half a percent against the US dollar but has since started to recoiver.
Chancellor Rishi Sunak will present his first Budget in the House of Commons from 12.30pm, and is expected to introduce a raft of healthcare funding to fight coronavirus, as well as further economic stimulus.
Naeem Aslam, chief market analyst at online trading firm Avatrade, said traders had been “taken by surprise as the announcement came out of the blue.
But he added the interest rate cut from the BoE is “only a drop in the ocean” compared to other central banks.
Mr Aslam said: The Bank of England has finally used its bullets and lowered its interest rates by 50 basis points, traders were taken by surprise as the announcement came out of the blue and this pushed the Sterling-dollar pair lower.
“But, we think a 50 basis point interest rate cut is only a drop in an ocean especially when we compare the BOE’s action with other central banks. I do think that the current action is enough to soften the blow at all.
“But, the move has improved the position of the FTSE 100 index which is trading higher, for now.”
Richard Lim, chief executive of research consultancy Retail Economics, explained the interest rate cut from the BoE has been made to ensure any economic damage is short-lived.
He said: “The shock to demand, output and disruption to supply chains is likely to be significant and the Bank of England has taken action to try to ensure that the blow to economic activity is shallow and short-lived.
“Much like the financial crisis, a coordinated global policy response across governments and central banks will be needed to limit the damage.
Shadow Chancellor John McDonnell has welcomed the move from the BoEbut called on more support from the Government over workers that may be forced to self-isolate from the coronavirus outbreak.
He tweeted: “Welcome the expected Bank of England cut to interest rate and measures to encourage bank lending but we now need firm and sufficient support from government for all those having to self isolate, many of whom do not have access to statutory sick pay.”
The rapid coronavirus outbreak has already had a sharp impact on businesses and the wider economy.
Firms throughout the country have reported huge falls in custom, as tourist numbers plummet and more people stay at home as they make preparations to self-isolate.
On Monday, the London Stock Exchange sank by eight percent in one of the biggest single-day falls since the financial crisis more than a decade ago.
British Chambers of Commerce director general Dr Adam Marshall said: “Businesses will welcome the decisive action taken by the Bank of England to support the economy at this delicate moment.
“The Bank and UK financial institutions must now work together to ensure that these policy measures translate into real-world support for firms on the ground.
“We will want to see banks using new flexibilities to do everything they can to help businesses whose cash flow and prospects have been disrupted due to the impacts of coronavirus.”
This is a breaking story. more to follow.
Published at Wed, 11 Mar 2020 07:15:00 +0000