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Friday, Dec 04, 2020

UK interest rates slashed to lowest level ever

UK interest rates slashed to lowest level ever

The Bank of England has cut interest rates again in an emergency move as it tries to support the UK economy in the face of the coronavirus pandemic.

It is the second cut in interest rates in just over a week, bringing them down to 0.1% from 0.25%.

Interest rates are now at the lowest ever in the Bank's 325-year history.

The Bank said it would also increase its holdings of UK government and corporate bonds by £200bn with an effort to lower the cost of borrowing.

It's a dramatic move by Andrew Bailey, who only took over from Mark Carney as Bank of England governor on Monday.

Last week, the Bank announced a 0.5% cut in rates to 0.25% and a package of measures to help businesses and individuals cope with the economic damage caused by the virus.

The move coincided with additional measures announced by Chancellor Rishi Sunak in the Budget.

However, the Bank said the measures it had taken so far were not going to be enough, and believed "a further package of measures was warranted".

"The spread of Covid-19 and the measures being taken to contain the virus will result in an economic shock that could be sharp and large, but should be temporary," it added.

The move comes as international investors are trying to secure more cash, in particular dollars. This means they're ditching assets such as UK government gilts, which are the "IOU" notes the government hands over to private investors willing to lend it money.

As the gilts are sold, the price drops and the yield - the effective interest rate compared to the price - rises. What that means is the cost of borrowing to private investors as well as to the government rises - just when the Bank of England wants it to fall and the government is about to borrow huge sums.

The Bank of England's plan to buy £200bn more bonds is aimed at fighting that effect.


'Lowest possible'

The fresh rate cut takes interest rates to the lowest they can feasibly go, said Jeremy Thomson-Cook, chief economist at payments company Equals Group.

"Lower rates and additional quantitative easing can keep markets satisfied and borrowing costs for both businesses and the government down but unless money is forced into the hands of small businesses soon, then it will be for nothing; they are the ones laying off staff due to a liquidity shock," he added.

Karen Ward, chief European market strategist at JPMorgan Asset Management, said: The support to the economy and health system will require vastly higher government borrowing. The central bank showing willing to buy government debt will ensure the market can absorb this additional issuance without undue stress."

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