There may be no vaccine yet for Covid-19, but the Bank of England yesterday morning gave us a full dose of what it hopes will be the financial equivalent; slashing interest rates from 0.75 per cent to 0.25 per cent. It has also relaxed the capital buffer requirements for banks — the amount of capital banks are required to hold back to defend against a financial crisis like that of 2008/09. This ought to allow banks to advance more loans to business.
Some have been wondering whether the bank is attempting the equivalent of fighting a viral infection with antibiotics. Lowering interest rates in normal circumstances might help boost demand but, as Lord O’Neill made the point on the Today programme yesterday morning, an economic stimulus designed to persuade us to go out and spend more money rather flies in the face of government efforts to encourage people with colds to stay at home. As for relaxing banks’ capital buffer requirements, what is the point of having measures designed to save the banking system from financial crisis if you are going to do away with them at a time of, er, financial crisis?
What could kill businesses in this crisis is not so much the cost of their loans, as a collapse in the number of customers walking through the door. That can’t be addressed through lowering interest rates — which were already close to a 400-year low in any case — but by avoiding panic. Somehow, the government needs to find a balance between the medical and the economic interest: to come up with proportionate measures to stop or slow the virus spreading, which do not lead to a collapse in demand. If we are all going to stay at home for months, shaking with fear, we are going to have a very deep recession with serious implications for funding of public services, NHS included.
No-one yet knows how the passage of this virus will turn out, but time will come when we will be able to judge the effectiveness of the full-on Italian approach of closing down an entire country (an approach which London mayoral candidate Rory Stewart has been advocating here for the past couple of days). It is hard to imagine how Italy — already in a decade-long slump — is going to come out of this without being put on financial life-support. Whether we end up full-Italy or proceed with the more balanced approach, which our government is still following — where schools and shops remain open, sporting events continue to go ahead and so on — the emergency interest rate cut will, I suspect, end up being an irrelevance.
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