The Bank of England has just announced that it is reducing interest rates to 0.1%. This follows moves by Central Banks around the world to ensure that there is liquidity in the financial system and no obstacles preventing businesses from borrowing or banks from lending that might worsen the impacts of the Covid-19 outbreak. In the UK, it is a signal to the government that “whatever it takes” means “whatever it takes”: the real need at the moment is for a huge fiscal boost to prevent the economy from going into a tailspin as shops and businesses close. With interest rates this low, there is no excuse for not acting big and acting fast.
The ball is now in the government’s court. By closing everything down, an economic crisis has been created; it not a financial one. The BoE has taken the brakes off – as indeed it should – and provided the platform from which the government can borrow cheaply to create the support structures and the platform for recovery when all this is over.
There is a big risk here for SMEs which is why the government has to act. The lesson of the financial crisis was that, however low interest rates went, small businesses were reluctant to borrow. Current uncertainty suggests that this will not be any different