‘This Is A Big Package’

The Bank of England did Wednesday what the Fed probably should have done last Tuesday – namely, take a holistic approach to emergency action in the face of a crisis.

The MPC voted unanimously to cut rates 50bps in an emergency move that takes Bank Rate back to a record low at 0.25%. Generally speaking, that’s at least as large a move as the market wanted and expected (market expectations and market wishes have become one and the same lately – that’s what happens when expectations morph into outright “demands”).

Further, the BOE rolled out a new funding vehicle (the “Term Funding scheme for Small and Medium-sized Enterprises”, or, “TFSME”) for small- and medium-sized enterprises “financed by the issuance of central bank reserves”. In other words, financed the same way the central bank finances QE – by creating money.

OIS was pricing around 38bps of easing into this month’s meeting – a 50/50 chance of a 50bps move. That accounts for the relatively muted reaction in the pound, which knee-jerked lower on the announcement before paring losses. This also makes the meeting itself (on the 26th) superfluous, to a certain extent, although I suppose it’s possible the bank could take additional action.

“When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates”, the statement reads.

“In order to mitigate these pressures and maximize the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate”, the BOE continued, adding that “additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises”.

The statement cites “experience from the Term Funding Scheme launched in 2016” in the course of projecting that TFSME may provide more than £100 billion in term funding.

But wait, there’s more.

The Financial Policy Committee cut the countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect. That will last for at least a year. The rate had been 1% and was set to rise to 2% by December. Now, it will be at 0% through March of next year.

“The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses”, the BOE remarked. “That is equivalent to 13 times banks’ net lending to businesses in 2019 [and] together with the TFSME, this means that banks should not face obstacles to supplying credit to the UK economy and to meeting the needs of businesses and households through temporary disruption”.

Now that’s what a “package” looks like. Mark Carney said it was aimed at scoring “maximum impact”, and promised the bank would do more if it has to, although that will be left to his successor. Carney will leave the BOE later this month.

“Markets will focus on the 50 basis point move, but arguably the more important measures are the ones policymakers unveiled to keep credit flowing to businesses affected by the virus”, ING said, in an e-mailed note. “As the full extent of the economic shock becomes clear, a further partial rate cut, coupled with fresh quantitative easing, is possible in coming months”.

At a presser with incoming governor Andrew Bailey, Carney said, among other things, that the BOE has operations in place to make loans to banks in other currencies and is coordinating its response with other central banks.

Bailey said policy will remain under “constant review” and persisted in the idea that there’s around 125bps more easing room available if it’s needed “when other tools are included”.

Crucially, this came just hours ahead of an expansionary budget which “will ensure businesses, the public and those in public services working on the front line against the virus get the support they need”, Chancellor of the Exchequer Rishi Sunak told the cabinet on Wednesday, ahead of delivering the budget statement to the House of Commons. “Despite the impacts of the outbreak being uncertain, we have the economic tools to overcome the disruption caused by the virus and move the country forwards”, Sunak remarked.

Boris Johnson’s government will promise to deliver around 600 billion pounds within five years, much of which is earmarked for infrastructure. The record spending binge means austerity is over. “This is a Budget for people right across the country — no region will be left behind”, Sunak declared. Public investment will jump to the highest in nearly six decades, apparently.

“The focus today is on mood, markets and policy response [and] the Bank of England’s MPC has grasped that nettle by cutting rates by 50bp at 7 am on the day of the Budget”, SocGen’s Kit Juckes wrote. “Rates are back at long-term lows [and] we will see fiscal easing and a promise of ‘whatever it takes’ to help deal with the effects of the Covid-19 outbreak”.

Ultimately, today is set to be a day when the UK delivers coordinated monetary and fiscal stimulus, a joint response missing across other locales. This should serve as a blueprint, although it won’t.

“These measures will help keep firms in business and people in jobs, and they will prevent a temporary economic disruption from causing long-term harm”, Carney told the media during the presser with Bailey. “This is a big package”.

Full statement 

Published on 11 March 2020

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

One thought on “‘This Is A Big Package’

NEWSROOM crewneck & prints