Bank of England Delivers Emergency Rate Cut to Combat Coronavirus Impact; Market Focus Turns to European Central Bank

The Bank of England delivered its first emergency rate cut since the global financial crisis, slashing its key benchmark by 50 basis points to an all time low of 0.25%.
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The Bank of England delivered its first emergency rate cut in more than a decade Wednesday, taking its key benchmark rate to the lowest level on record in the latest central bank effort to support markets and economies as the coronavirus spreads rapidly throughout Europe.

The BoE lowered its key Bank Rate by 50 basis points, to 0.25%, following an emergency meeting in London Wednesday that will likely mark the final policy action of out-going Governor Mark Carney. It was the Bank's first unscheduled move since the global financial crisis of 2008 and puts the the key lending rate at the lowest in the Bank's 300-year history. The Bank also detailed a package that will support the country's biggest lenders in order to entice more investment into the real economy by easing their capital requirments.

"Following the spread of Covid-19, risky asset and commodity prices have fallen sharply, and government bond yields reached all-time lows, consistent with a marked deterioration in risk appetite and in the outlooks for global and UK growth," the Banks said in a statement. "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," the Bank added. "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 said.

The pound, which initially slid to a session low of 1.2870 immediately following the rate move, was last marked at 1.2938 against the U.S. dollar, while the benchmark FTSE 100 was seen 1.11% higher by mid-morning as banks rallied on the BoE's plan to ease capital restrictions. 

The BoE's surprise move comes just hours ahead of a key budget statement in Parliament from the ruling Conservative government, which is expected to unveil detailed spending initiatives aimed at insulating the economy from the coronavirus threat.

The government's response was put into even sharper focus Wednesday following confirmation that one of the country's top lawmakers, Heath Minister Nadine Dorries, has contracted the coronavirus and is now in medial isolation. Only last week, Dorries attended an International Women's Day event with Prime Minister Boris Johnson, 

"This is undoubtedly a big move from the Bank of England. We had wondered whether concerns surrounding the Bank’s independence could have got in the way of easing at the same time as the budget," said ING economist James Smith. "But given that a primary aim of this package will be to improve confidence, acting in coordination with the Treasury arguably makes sense."

Investors are likely to turn now to the European Central Bank, which meets Thursday in Frankfurt, for further monetary support amid the growing coronavirus threat, which has infected more than 114,000 people around the world and is now spreading at a faster rate outside of China than within.

The ECB is expected to lower is overnight deposit rate -- which already sits at a record low of -0.4% -- by a further 10 basis points, and may also unveil some new targeted lending operations to support the region's banks, which have been struggling to maintain consistent profitability amid the negative rate environment that has been in place since 2014.