Bank of England finally comes to terms with coronavirus, slashes rates by 50 basis points

After weeks of dragging its feet on the issue, the Bank of England has finally cut its interest rates by 50 basis points in view of the mounting threat of the coronavirus epidemic. The country’s central bank has cut rates from 0.75 per cent to 0.25 per cent after its monetary policy committee in an unscheduled meeting voted unanimously in favour of a rate cut to confront this latest threat to the British economy. The announcement comes just hours before Chancellor of the Exchequer, Rishi Sunak, is about to present his government’s budget which would most certainly contain policy measures to deal with the slowdown that has been induced by the fear of this potential pandemic.

The situation of the United Kingdom in the midst of this epidemic is far more tender than any other country. The preceding three years until the passage of the Brexit event had brought with it some unimagined and unanticipated eventualities that threatened to drag the British economy further by decades. Several structural features of the European economic union that had helped the United Kingdom become more competitive and cost-effective had now been withdrawn, and the country had been left to fend for itself. This put a lot of confusion and anxiety in the minds of business owners in the country who were uncertain about what the future might entail for them. Most businesses, thus, started to curtail their activities and either postponed or cancelled forward capital investments until better clarity emerged. During this whole period, the Bank of England had followed a liberal monetary policy to arrest the sliding condition of the British economy. But the overwhelming state of confusion and dismay among the British people was putting all its efforts to no avail. Towards the end of 2019, the bank was facing an unprecedented situation; while the economy had still not been showing any signs of recovery, the bank warned that any further interest rate cut would pull the country into a liquidity trap and cause far more damage to the fragile economy compared to bringing about any growth at all. Yet, it still considered cutting the rates further if the economy did not show signs of recovery before its next policy meet.

By the next policy meet, the bank was not disappointed though; ever since the victory of Prime Minister Boris Johnson in the December 2019 general elections, there was an increasing number of leading economic indicators that had started to trend in the positive territory one after the other. The consumer confidence index, the new hiring numbers, the new mortgage transaction numbers, the house price growth figures had all started to trend positively. Some of these indicators even breached monthly and annual records. The mood had surely improved among the average British citizen and businesses, though not to be termed as euphoric, by the time the central bank met at the end of January 2020 to decide on its policy rates. The bank, thus encouraged by this positive turn of events, decided to hold its policy rates unchanged.

The central bank's reluctance to hold its policy rates this time around was prompted on two counts, first, by the improving economic situation in the country and second, by a host of expansionary fiscal policy measures being hinted by the government that could very put the country in a growth trajectory comparable to that of developing countries. However, towards the last week of February, the situation had changed altogether. The coronavirus epidemic had taken grip of the entire world economy, and with it, a significant part of the British international trade had been affected. Domestically also the situation has become worse with more than 300 people in the country having already been infected by the virus and seven people already reported dead. Today it has been reported that British junior minister of health, Nadine Dorries, has also tested positive for the virus amidst the ongoing parliamentary session. This puts to risk a number of other MPs and other top government officials whom the minister must have come across in the past few days. Should more infections be found among these parliamentarians, the situation will become unprecedented.

This monetary policy decision of the British central bank, however, comes a little late compared to its major global counterparts. Last Tuesday, the Federal Reserve of the United States had also cut the US benchmark interest rates by half a percentage point and set it in the 1 per cent to 1.25 per cent target range. The magnitude of the rate cut, not seen since the collapse of Lehman Brothers in 2008, demonstrated how concerned the central bank was regarding the financial and economic impact of the virus outbreak. Federal Reserve chairman Jerome H. Powell shortly after the rate cut announcement said in an interview that the action was warranted as it was felt that the outbreak had reached a proportion where it posed a risk to the outlook of the US economy. On the same day, the Reserve Bank of Australia also cut its rates by a record half a percentage point to set a new record low of 0.5 per cent. The bank's governor, Philip Lowe, while speaking on the eve of the announcement had stated that the outbreak of the virus overseas is having a significant impact on the Australian economy, particularly the education and travel sectors. Both of the above countries have significant trading relations with China and other adjoining countries who have been facing the maximum brunt of the coronavirus outbreak. The respective heads of both the central banks had also further stated in their interviews on the day that they could very well revisit interest rates if the situation further deteriorated. Japan, one of the closest and economically largest neighbours of China has also announced contingency measures to offer aids of nearly $15 billion to businesses affected by the virus outbreak and public spending of nearly $ 4 billion to prop up the country’s economy. Other than the above several other countries have also announced both policy and monetary measures to deal with the epidemic threat, with the world bank on its part announcing an aid of $12 billion to countries who are fighting to contain the epidemic spread.

Given the severity of the situation, the rate cut will not be a sufficient measure. Several policy measures have to taken by the government specifically directed towards the pandemic to effectively deal with the situation. In a rare move, three major baking groups in the country have come forward to join hands with the government to fight the threat from the coronavirus epidemic. These banks have announced that they would grant mortgage payment holidays to its customers who are reeling under the impact of coronavirus and are faced with major business disruptions.