Amid the global human, employment and economic chaos caused by the Coronavirus pandemic, the emergency announcement by new Bank of England Governor Andrew Bailey to cut the base rate to just 0.1% (the lowest level ever in the Bank’s 325-year history and the second in only a week) almost went under the radar. The Bank will also buy an additional £200bn of UK government and corporate bonds under a Quantitative Easing (QE) money-printing programme, designed to hold down the cost of borrowing and pump cash into the economy. So, what impact will this have?
Andrew Bailey said the central bank moved quickly to calm markets spooked by the growing number of deaths from Covid-19 and concerns that the world’s major economies are likely to suffer the steepest falls in GDP since the 2008 financial crash. He suggested that the economic shock may be sharp and large, but it should be temporary.
The initial reaction to the announcement from markets, Sterling and the oil price were favourable albeit it appears that this was short-term only as all deteriorated shortly thereafter as the reality of rapidly rising numbers of deaths continued.
As we know, interest rates were already very low at 0.25% and so some may conclude that the move has simply made that cheap borrowing facility even cheaper. So, more bad news for savers as savings accounts will pay even less interest. Conversely, that could make cheap stock market investments (with impressive dividends) all the more attractive as, over the medium to longer term, we envisage inevitable improvements from these heavily discounted levels, even if there are never any guarantees. As an example, the Dow Jones Index in the US (which we had considered to be expensive for some time) was threatening to breach 30,000 as recently as 12 February. At the time of writing it is hovering around 18,900. That is a drop of 37%! The UK market has fallen by a similar percentage despite the fact that it didn’t experience the same level of growth as the US Index, having been held back by BREXIT. We view the UK market as far better value from this point.
Naturally, the lowering of interest rates will not in itself solve the economic crisis caused by Covid-19 but what it will do is “grease the wheels” to allow the financial industry the opportunity to recover as more and cheaper loans will be available to businesses and individuals. This should help support employment and should also help the Government borrow further substantial sums in the coming months at extraordinary low cost.
