An economic shock of unknown size has reached UK shores: on Tuesday the Bank of England and the government moved jointly to try to contain it.

On Tuesday morning, the bank rate was cut by 0.5% to 0.25% and the Bank of England has taken a number of measures to incentivise bank lending to households and businesses.

The last time there was a unscheduled decision to cut the cost of borrowing was in October 2008 as the economy headed for recession.

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Is that where we’re going now? The answer to that question is unknowable because the scale of what is to come is so uncertain. “The direction is clear, the magnitude is not,” as Mark Carney puts it.

The Bank has a network of agents across the UK and they are in close contact with businesses.

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The message from the high street is that retail sales are falling; the message from the factory floor is that production lines are slowing. It seems safe to assume we are in the foothills of something potentially very serious.

The Bank of England is assuming that the virus and the measures necessary to tackle it will cause a “large and sharp” hit to economic growth but one that “should be temporary”.

Demand and supply will be affected in the coming months and “activity is likely to weaken materially“.

The plan is to try to keep businesses in business and people in work for as long as it takes for the storm to blow over by making money cheap and plentiful to borrow.

Governor of the Bank of England, Mark Carney, and Andrew Bailey, Governor-Designate on Tuesday. Credit: PA

The impact of cutting interest rates by 0.5% is likely to be fairly limited.

The 5.7 million households with a fixed rate mortgage will not see any benefit.

UK Finance calculates that repayments of 2.2 million variable and base rate tracker mortgages will fall between £20 and £30 a month. That’s helpful, of course, but hardly awe-inspiring.

The measures the Bank is taking to incentivise bank lending are sophisticated and feel far more substantial. The Term Funding Scheme is being dusted down and revived.

This will enable banks to borrow directly from the Bank of England over a four year period and at more or less 0.25%. This money can used to lend to businesses and households that need it.

The cut in interest rates will not make a difference to those on a fixed rate mortgage. Credit: PA

The Bank is also lowering the counter cyclical buffer (the additional cushions of capital that lenders are required to hold to absorb losses) to 0%.

The Bank calculates that this alone will generate almost £200 billion of lending, which is thirteen times the amount that UK companies collectively borrowed last year.

These moves are somewhat unexpected but hardly a surprise. The financial markets have been signalling their concern that coronavirus could trigger a global downturn by aggressively selling shares.

There was a positive response to the Bank of England’s announcement, albeit fairly muted. At 11am on Tuesday, the FSTE100 was up 1%.

There are plenty of things to worry about in the months ahead, but the Bank of England believe that the resilience of the financial system is not one of them.

The banks have been stress-tested to withstand economic disruption of a magnitude that is greater than the Bank expects we will face as a result of the virus outbreak.

Let’s hope their assumptions prove correct.