The Monetary Policy Committee (MPC) has voted unanimously to reduce the interest rate from 0.75% to 0.25%, and for the Bank of England to introduce a new Term Funding scheme with additional incentives for small and medium-sized enterprises (TFSME).
“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,” reports the Bank.
“When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates.
“In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate.
“Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs).”
The Financial Policy Committee (FPC) has also 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. The FPC 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 Bank explained: “The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses. Together with the TFSME, this means that banks should not face obstacles to supplying credit to the UK economy and to meeting the needs of businesses and households through temporary disruption.”
The Prudential Regulation Authority (PRA) has also set out its supervisory expectation that banks should not increase dividends or other distributions, such as bonuses, in response to these policy actions.
* The countercyclical capital buffer rate is intended to protect the banking sector against losses that could be caused by cyclical systemic risk, which is the risk of business or economic cycles having an adverse effect on the returns of an investment, a group of investments or an individual company’s profits.