By Tom Rees
Investors are betting on a 0.5 percentage point cut within weeks in response to the rising threat of a global recession, bringing rates down to 0.25pc. It is thought that further cuts by the summer could then take rates even closer to rock-bottom levels.
A cut would boost millions of mortgage holders by reducing their payments, but spell misery for savers who would earn even less on their deposits.
Yields on some UK government debt turned negative for the first time ever as signs of plunging confidence increased the pressure on the Bank’s rate-setters and Chancellor Rishi Sunak to announce emergency support.
The yield on a two-year bond – which drops when demand rises – slipped as low -0.04pc in morning trading, meaning panicked customers were willing to pay the Government for borrowing their cash.
A survey of bosses by the Institute of Directors (IoD) found a fifth said the coronavirus was a severe or high threat to their business, and more than a third are already acting on contingency plans to prevent disaster.
Gains in confidence since the Tories' election victory have been wiped out, the IoD found. A separate survey by data firm Sentix suggested that in the eurozone, investor confidence has tumbled to its lowest level since 2013.
George Buckley, Nomura UK economist, predicted that the Bank will unveil co-ordinated action with the Treasury on Wednesday when Mr Sunak delivers the Budget.
But he also warned that reducing borrowing costs cannot offset the full impact of the virus.
The Bank’s base rate is already close to historic lows at 0.75pc and its policymakers have argued that 0.1pc is the floor for borrowing costs.
The timing of stimulus from the Monetary Policy Committee has been complicated by Mr Carney’s departure at the end of the week, with the next scheduled rate-setting meeting on March 26.
The US Federal Reserve already announced the first emergency rate cut between regular meetings since the financial crisis last week with the European Central Bank also expected to unveil stimulus.
Speaking to BBC Radio 4, he said: “This virus and its economic impact are not amenable easily just to cuts in interest rates or fiscal expansion."
Lord King added that the economic damage caused by the outbreak requires much more targeted measures.
Markets have nearly fully priced in a cut in rates to 0.25pc but the Bank has other tools at its disposal.
Its policymakers could reboot its quantitative easing programme, offer banks long-term loans at close to the base rate through the Term Funding Scheme and release the cash buffer it makes the banking industry hold.