The Bank of England (“BoE”) has announced a comprehensive and timely package of measures to help UK businesses and households bridge across the economic disruption that is likely to be associated with Covid-19. It is hoped that these measures will help to keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm.
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 BoE acknowledged that 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. In response, the BoE has issued the following measures:
- Reduced the Bank Rate by 50 points to 0.25%. Over the next 12 months the BoE will also offer four-year funding at interest rates at (or very close to) the Bank Rate. Additional funding will be available for banks that increase lending, especially to SMEs.
- 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. It 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. The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019.
- The PRA has set out its supervisory expectation that banks should not increase dividends or other distributions, such as bonuses, in response to these policy actions.