Monetary policymakers said the move is to help businesses and households through an economic shock from the virus that could prove “sharp and large” although it is likely to be temporary.
A special meeting was held yesterday where the Monetary Policy Committee (MPC) voted unanimously to reduce the base rate by 50 basis points from 0.75 per cent.
In a statement the bank said: “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.”
The rate cut takes interest rates back to their lowest point in history and is coupled with support for businesses with a new term funding scheme.
Bank credit rules have also been relaxed to ensure businesses can get through any disruption that could come from the coronavirus.
Funding costs still key
Kensington Mortgages capital markets and digital director Alex Maddox noted the move was not a big surprise as the market was predicting a 0.5 per cent rate cut with a 60 per cent probability.
However, he suggested this may not have such a big impact on mortgage rates.
“It is likely that this is just one of many actions that government and the Bank of England take to provide support to the economy,” he said.
“The budget later today may also contain some announcements. For customers with tracker mortgages this rate change will be welcome and reduce their monthly payments very quickly.
“Fixed rates will not drop as quickly though, as lender’s funding costs may still stay high even after this rate cut,” he added.
Lowest rates ever
Laura Suter, personal finance analyst at investment platform AJ Bell, said: “This was a swift move from the Bank of England in an attempt to support the UK economy amid the coronavirus turmoil, but the unanimous vote to slash rates back to the lowest point in history will shock some at how quickly it happened.
“The move, which takes rates lower than in the financial crisis, is the first unscheduled interest rate change from the Bank of England since the banking crisis 12 years ago. The cut to 0.25 per cent also leaves minimal ability to slash rates further in the future.
“However, while the package of measures will help businesses they will be light relief for individuals, who are unlikely to see a big impact from the cuts.
“Mortgage rates are already near record lows and it’s unlikely providers will be able to cut them much more – let alone pass on the entire rate cut. The exception is those on tracker rates, who will see a near-immediate effect on their monthly repayments.
Earlier this week stock markets plummeted amid fears of the economic impact of the global outbreak.
The move by the Bank of England comes ahead of the 2020 Budget later today which is set to be dominated by the government’s response to the coronavirus.
Chancellor Rishi Sunak is expected to announce further initiatives to help businesses and a package of spending measures to help the UK’s economy.