The Bank of England has cut interest rates in an emergency move to bolster the economy during the coronavirus outbreak.

The monetary policy committee voted unanimously to slash the bank rate from 0.75% to 0.25% at its first unscheduled meeting since the depths of the 2008 financial crisis as part of a coordinated package of measures alongside the chancellor Rishi Sunak’s budget.

Investors initially welcomed the move, which went beyond expectations of a 0.25-point cut in borrowing costs, with the FTSE 100 rising 2% when markets opened after the 7am announcement. However, the shine wore off after renewed coronavirus fears, and the index of leading shares closed down 83 points, or 1.4%, at a new four-year low of 5,876.

Wall Street also suffered heavy losses as the World Health Organization declared a coronavirus pandemic. The Dow Jones closed down 1,464 points or 5.8% at 23,553.

The Bank of England rate cut came as official figures showed that GDP growth in the UK flatlined in January before the virus hit Europe, adding to fears that the economy is in a weak position heading into what could be the worst phase of the outbreak.

The Office for National Statistics said a 1.2% drop in manufacturing output in the three months to January, from the three months to October, pulled down the UK’s growth rate to zero, dashing hopes that the economy would enjoy a bounce after December’s general election.

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In his final week before being replaced by Andrew Bailey on Monday, the Bank’s governor, Mark Carney, said: “This is a big package. It is a big deal.

“It will have real economic effects, but also acting across the world and in a coordinated manner with the government in a way that makes it clear that we are going to bridge a situation, as opposed to allowing it to be turned into something worse.”

In a doubled-headed press conference alongside Bailey, the outgoing chief executive of the Financial Conduct Authority, Carney said the Bank still had ample room to unleash further stimulus to support the economy, despite interest rates down to the lowest rate in the Bank’s 325-year history.

The unfolding economic shock was not a rerun of the financial crisis, he said. Referring to the October 2008 rate cut coordinated between central banks around the world, he added: “We did that to get to the weekend. We’re in a different place. This isn’t about making it to the weekend.

“There is no reason for this shock to turn into the experience of 2008 and a virtual lost decade in a number of economies, if we handle it well.”

Carney and Bailey have said negative interest rates, whereby banks are forced to pay money to borrowers, would not be used. However, the Bank could pump up its quantitative easing bond-buying programme to further lower borrowing costs.

Mortgage lenders were expected to react quickly to the central bank decision by cutting the costs of monthly mortgage bills. Bank loans were also expected to follow the same downward path, although overdraft and credit card lending rates are expected to remain the same.

HSBC became the latest high street bank to announce support measures on Wednesday when it said it would allow UK families and companies to defer payments on mortgages and business loans if required.

The interest cut came as part of a wider package of measures announced by the Bank that was designed to dovetail with Sunak’s budget.

Alongside the headline interest rate cut, the Bank also introduced a term funding scheme with additional incentives for small and medium businesses, funded by central bank reserves. It is designed to encourage lenders to offer cheap loans to firms amid the unfolding economic crisis.

The bank said the scheme, a successor to a 2016 fund that pumped £127bn into the economy via cheap business loans, could again provide in excess of £100bn in funding.

With the UK facing the biggest financial threat in more than a decade on the back of fears the outbreak could cause a recession, the Bank said the measures would help to support business and consumer confidence, bolster the cash flows of companies and households, and reduce the cost and improve the availability of finance.

Adam Marshall, the director general of the British Chambers of Commerce, called the move “decisive” and an important cut in borrowing costs for businesses “at this delicate moment”.

He said: “The Bank and UK financial institutions must now work together to ensure these policy measures translate into real-world support for firms on the ground.”

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The Bank’s term funding scheme offers banks and building societies funds at or close to the bank rate for up to four years. The previous scheme closed to new lending in February 2018, having made £127bn of loans. The scheme is expected to last for one year.

To coincide with the rate cut, the central bank’s financial policy committee immediately cut the “counter-cyclical” capital buffer for banks from 1% to zero – giving them more room to lend. It expects to maintain the buffer, which governs the amount of capital banks must hold to protect against losses, at zero for at least 12 months. “Buffers are there to be used,” Bailey said.

Another division of the central bank, the Prudential Regulation Authority, which supervises banks and insurers, told lenders not to increase dividends or other distributions, such as bonuses, in response to these policy actions. It said the benefit should be passed on to business customers and not bank shareholders.