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Budget day kicks off with early interest rate cut

Budget day started early today with the 7am announcement from the Bank of England that it was cutting the base lending rate from 0.75% to 0.25% – a historic low for interest rates.

11th Mar 2020
Editor in Chief (interim) AccountingWEB
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Bank of England

The bank’s monetary policy committee made the decision at a special meeting last night as part of a package of measures to soften the impact of the coronavirus on UK small businesses.

As part of this initiative, the bank is deploying £10bn of its reserves for business and bank support initiatives, including a Small and Medium-sized Enterprises (TFSME) scheme to underwrite business lending for the next five years.

The new fund would “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”, the bank said.

Meanwhile, the bank’s Financial Policy Committee (FPC) has loosened its capital reserve controls on high street banks to enable them to lend more.

The “countercyclical capital buffer rate” demanded by the BoE will be reduced from 1% to 2% to allow the release of extra cash for lending.

The relaxation was justified on the basis that the core banking system has proved itself resilient enough to take it. The Bank of England explained: “[Recent] 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.”

The announcement follows a meeting last week between the Chancellor, the Prime Minister and Bank of England governor Mark Carney and forms part of a concerted campaign to counteract the sudden nosedive in consumer demand, share prices and business confidence in the wake of the Covid-19 outbreak.

More announcements and support measures will undoubtedly follow later today in the “coronavirus Budget” being presented by Chancellor Rishi Sunak in Parliament at 12:30pm. Suggestions for potential business support initiatives include:

  • A VAT rate cut or time to pay payment holidays on business tax
  • Business rate cuts or payment holiday
  • A statutory sick pay fund for self-employed and zero-hour contract workers

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