On Wednesday (March 11), the Bank of England (BoE) – the UK’s central bank — announced that it had cut its base rate to just 0.25% as part of a set of measure designed to “respond to the economic shock from Covid-19.”
The BoE’s announcement started by explaining the motivation behind these measures:
“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. 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.
“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.”
So, the BoE had a special meeting last night, where the Monetary Policy Committee (MPC) “voted unanimously to reduce Bank Rate by 50 basis points to 0.25%.” The Bank Rate (aka “Bank of England base rate”) is “the rate the Bank of England charges other banks and other lenders when they borrow money.”
Although Asian stock market indices such as Hong Kong’s Hang Seng Index , Shanghai Composite Index, Japan’s Nikkei 225 fell today (0.63%, 0.94%, and 2.27% respectively), UK and European stock market indices are almost all higher today (the main exception being Spain’s IBEX 35 index).
The BoE’s emergency rate cut seems to have helped both the UK and the European stock markets due to the increasing confidence among traders that governments around the world are beginning to understand that they need to act quickly and decisively to reduce the economic impacts of COVID-19.
As macro-economist and crypto analyst Alex Krüger pointed out earlier today, the next two central banks that are expected to announce interest rate cuts are the European Central Bank (ECB) and the Federal Reserve (aka “the Fed”).
