MNI: Bank of England Cuts Bank Rate 50 Bps To 0.25%

     LONDON (MNI) - At its special meeting ending on 10 March 2020, the Monetary

Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points

to 0.25%. The MPC voted unanimously for the Bank of England to introduce a new

Term Funding scheme with additional incentives for Small and Medium-sized

Enterprises (TFSME), financed by the issuance of central bank reserves. The MPC

voted unanimously to maintain the stock of sterling non-financial

investment-grade corporate bond purchases, financed by the issuance of central

bank reserves, at stg1 0 billion. The Committee also voted unanimously to

maintain the stock of UK government bond purchases, financed by the issuance of

central bank reserves, at stg435 billion.

     The reduction in Bank Rate 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.

     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.

Additional funding will be available for banks that increase lending, especially

to small and medium-sized enterprises (SMEs). Experience from the Term Funding

Scheme launched in 2016 suggests that the TFSME could provide in excess of

stg100 billion in term funding.

     The TFSME will:

     help reinforce the transmission of the reduction in Bank Rate to the real

economy to ensure that businesses and households benefit from the MPC's actions;

provide participants with a cost-effective source of funding to support

additional lending to the real economy, providing insurance against adverse

conditions in bank funding markets; incentivise banks to provide credit to

businesses and households to bridge through a period of economic disruption; and

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. FPC Releases the UK

Countercyclical Capital Buffer To support further the ability of banks to supply

the credit needed to bridge a potentially challenging period, the Financial

Policy Committee (FPC) has reduced the UK countercyclical capital buffer rate to

0% of banks' exposures to UK borrowers with immediate effect. The rate had been

1% and had been due to reach 2% by December 2020.

     The FPC expects to maintain the 0% rate for at least 12 months, so that any

subsequent increase would not take effect until March 2022 at the earliest.

     Although the disruption arising from Covid-19 could be sharp and large, it

should be temporary. Such economic disruption should have less of an impact on

the core banking system than recent stress tests run by the Bank have shown the

system can withstand. Those stress tests demonstrated that banks would be able

to continue to lend to businesses and households even while absorbing the

effects of substantial, prolonged economic downturns in both the UK and the

global economies, as well as falls in asset prices much larger than experienced

in recent weeks.

     Given the resilience of the core banking system, businesses and households

should be able to rely on banks to meet their need for credit to bridge through

a period of economic disruption.

     The release of the countercyclical capital buffer will support up to stg190

billion of bank lending to businesses. That is equivalent to 13 times banks' net

lending to businesses in 2019. Together with the TFSME, this means that banks

should not face obstacles to supplying credit to the UK economy and to meeting

the needs of businesses and households through temporary disruption.

     The FPC and the Prudential Regulation Committee (PRC) will monitor closely

the response of banks to these measures as well as the credit conditions faced

by UK businesses and households more generally.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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