The central bank will also introduce a new term funding scheme (TFSME) with additional incentives for SMEs.
According to the BoE, the interest rate cut will help to support business and consumer confidence, boost the cash flows of businesses and households, and improve the availability of finance.
Over the next 12 months, the TFSME will offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at — or very close to — the bank rate.
Additional funding will be available for banks that increase lending, especially to SMEs.
The Bank of England estimates that the TFSME could provide in excess of £100bn in term funding.
Andrew Montlake, managing director at Coreco, commented: “For a central bank to cut rates on the morning of a Budget is an extraordinary move that reflects the gravity of the Covid-19 situation [currently] unfolding.
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"Lenders will be in a tailspin this morning as they seek to get their heads around this drastic move from the Bank of England.”
He added that the “emergency cut” will put even more pressure on lenders that are already “struggling with slim margins".
Paresh Raja, CEO at Market Financial Solutions, wasn’t surprised by the interest rate cut.
“For property owners and first-time homebuyers, this means there is a brief window of opportunity to secure a competitive mortgage with low interest rate repayments.”
However, he added that this latest cut would affect those relying on a traditional bank account to build up their savings.
“Interest rates have been hovering below 1% for over a decade, making it extremely difficult to build a sizeable savings pot in a traditional savings account.”
Mark Harris, chief executive at mortgage broker SPF Private Clients, claimed that the Bank of England’s decision was a “bold and decisive move”.
Tomer Aboody, director at MT Finance, said that business would welcome this move for now, but claimed it could delay the economic plan of the government going forward.