"This is a decisive move by policymakers who are scrambling to address the potentially wide-ranging fallout on the economy as the virus continues to spread rapidly."
The Bank of England has launched a package of measures in response to the economic shock from Covid-19, including additional measures to increase lending to SMEs.
Alongside this morning's unexpected 0.5% cut to Bank Rate, the Bank has pledged a boost to funding for SMEs and reduced the capital buffer banks are required to maintain.
Additional funding will be available for banks that increase lending, especially to SMEs. Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.
In a statement, the Bank noted that "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.
It is hoped that this will 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.
Anna Stupnytska, head of global macro at Fidelity International, commented: “In an emergency move, the Bank of England (BoE) has cut interest rates by 50 basis points, following the Federal Reserve’s move last week. In addition, the Bank announced a new funding scheme aimed at supporting small and medium-sized enterprises (SMEs) exposed to the coronavirus shock.
“This is a decisive move by policymakers who are scrambling to address the potentially wide-ranging fallout on the economy as the virus continues to spread rapidly.
“The cut also comes earlier than expected - a few hours before the new Chancellor Rishi Sunak is scheduled to unveil his first budget which is likely to focus on fiscal measures aimed at helping the economy navigate the shock.
“While the action from the BoE and the Treasury on the same day signals the policymakers’ preparedness to respond, the high degree of uncertainty around the extent of the coronavirus spread and its economic impact makes it difficult to gauge whether the new policy measures are going to be sufficient to avert a recession this year.”