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Bank of England cuts rates amid Covid-19 uncertainty

By Lawrence Gash

Donald Trump lambasts Federal Reserve Chair

The Bank of England (BoE) has reduced its main borrowing rate by half a percentage point to 0.25 per cent in response to the “economic shock” triggered by the ongoing coronavirus outbreak.

Outgoing governor Mark Carney stated his aim to maintain the flow of credit through the UK economy throughout the length of the crisis: “Maximising the effectiveness of our response requires working in concert with the Treasury, and that’s why we are acting on Budget day.”

The newly-appointed chancellor of the exchequer Rishi Sunak will set out the government’s economic response to the effects of Covid-19, which has already infected health minister Nadine Dorries.

Beyond an emergency injection of funds for the National Health Service the chancellor is expected announce measures to aid small businesses and the self-employed who are suffering from a loss of trade.

While referring to his cut as a “big package”, Mark Carney stated further stimulus was available should Britain’s economy continue to struggle. He also pointed to the BoE’s decision to allow banks to lend an additional £200bn in corporate credit as “exactly the kind of drawdowns that would be required in this kind of situation.”

Andrew Bailey, who will take over as governor of the BoE next week, observed that his predecessor had probably used up just over half of the stimulus available to the central bank, noting: “That means more is available.”

Despite the larger than expected cut, UK markets did not surge dramatically in Wednesday morning trading. Although sterling has gained by more than 0.5 per cent on both the euro (EUR) and the dollar (USD), at the time of writing the FTSE 100 and 250 had only gained by 0.44 and 0.86 per cent respectively. Meanwhile, leading European indices have seen gains of more than 1 per cent.

Although investors could be holding their breath for the chancellor’s budget statement, such a muted response could be said to mirror the reaction seen in the US last week when the Federal Reserve also cut rates by 0.5 per cent.

The Fed is widely expected to cut rates yet further in order to soothe the US economy which is reeling from the shock of the Saudi-Russian oil price war and the spread of Covid-19.

Nonetheless, US president Donald Trump has castigated the world’s leading central bank:

"Our pathetic, slow moving Federal Reserve, headed by Jay Powell, who raised rates too fast and lowered too late, should get our Fed Rate down to the levels of our competitor nations. They now have as much as a two point advantage, with even bigger currency help. Also, stimulate!"

With Dow futures indicating a morning drop of around 500 points, it is possible that Tuesday’s rebound could be short-lived.

FURTHER READING: Price of oil is on the rebound

FURTHER READING: Italy is on total lockdown

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