Bank of England could cut interest rates in response to coronavirus

 

The US Federal Reserve has slashed its interest rates and the Bank of England could follow suit as the coronavirus threat takes hold.

Leading investment firms are predicting that the Bank of England may slash its interest rates to stimulate the country’s economy, according to reports. Both the US Federal Reserve and the Bank of Canada have already cut rates by 0.5% as a result of the coronavirus outbreak.

Analysts at Goldman Sachs expect the Bank of England will announce a base rate cut of 0.5% next month. Similarly, UBS believes the BoE will trim rates by a more modest 0.25%.

A domino effect for the UK

The actions of the banks in America and Canada mark the first emergency interest rate cuts since 2008. Steps such as these tend to create a domino effect, and Australia, Malaysia and others have already followed suit.

Goldman Sachs analysts said: “The coronavirus outbreak is expected to push the UK economy to the edge of recession. The hurdle for action is low and the [rate-setting] Monetary Policy Committee (MPC) has sufficient policy space to join other major central banks in easing policy.”

At UBS, Anna Titareva said: “Liquidity shortages, coupled with high levels of uncertainty about the spreading of the virus, could then lead to staff layoffs and bankruptcies, which would imply that a temporary, albeit significant, supply shock would turn into a longer-lasting demand shock.”

Do we need to cut rates?

Other experts think that the Bank of England should pause before taking drastic action. Cutting interest rates should only happen in extreme situations, they say.

Russ Mould, investment director at AJ Bell, said: “Any economic shock caused by coronavirus would have to be very bad to really justify a rate cut, especially as the Bank of England has very little wiggle room, with the headline base rate already standing at just 0.75%.

“If a real recession does hit, the rates could end up at zero or even going negative – and that would mean, in a most extreme case, savers are charged for keeping money in the bank.”

The upside for homeowners

In terms of the housing market, many wonder whether coronavirus will have an effect. The impact on the global stock markets has so far been severe. This means the more predictable, less volatile property investment landscape is winning many investors over. The UK housing market in particular can be a safe haven for many.

If the Bank of England cuts interest rates, this could at least be good news for property owners. Those with mortgages could get better rates, while first-time buyers might get better deals.

Landlords and investors who own a number of properties could also benefit. Those with heavy borrowing will get the biggest uplift from lower rates. With some landlords reducing their buy-to-let investments due to tax changes, getting a good mortgage rate makes a real difference.

We will keep you updated on any base rate changes. Check back to our news pages for more information.

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