- The Bank of England has taken interest rates down by a further 15 basis points to a record low of 0.10%. The Bank has also revived Quantitative Easing by announcing it will buy a further £200 billion of government and corporate bonds, taking the total up to £645 billion. The majority of this will be through the purchase of gilts.
- The Bank of England highlighted tightening financial conditions in the UK with conditions in the gilt market deteriorating.
- The Bank will also enlarge its Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME).
- The Bank of England will meet for its regular March MPC meeting next Wednesday (25 March).
- Further highlighting the mounting concerns over the UK economy and the problems for many businesses and households, this latest stimulative package from the Bank of England comes only eight days after it cut interest rates by 50 basis points from 0.75% to 0.25% and announced the Term Funding scheme with additional incentives for Small and Medium-sized Enterprises.
- The Bank of England and the Treasury are moving rapidly to try and help businesses affected by coronavirus and households and hence limit the potential damage to the UK economy. The latest Bank of England action comes shortly after the Chancellor announced a further £20 billion of supportive fiscal measures to help business (in particular) and households and also announced that the government would guarantee £330 billion (equivalent to 15% of GDP) of bank lending to businesses. The Chancellor also made it clear that there would be further measures to come, particularly to help households hit by a loss of income or employment.
- Further Bank of England action to support the economy remains very much on the cards. Indeed, it could yet announce further measures on 26 March after next week’s scheduled MPC meeting. However, we doubt it will take interest rates any lower than 0.10%. The Bank of England has regularly indicated that it sees the lower bound for interest rates as close to, but just above zero.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The Bank of England has cut interest rates by 15 basis points to 0.10% from 0.25%, taking them down to the lowest ever level. This cut comes only eight days after the Bank cut interest rates by 50 basis points to 0.25% from 0.75%.
“The Bank of England has also revived Quantitative Easing (QE) by announcing it will buy a further £200 billion of government and corporate bonds, taking the total up to £645 billion. The majority of this will be through the purchase of gilts. The Bank of England last undertook QE in August 2016 in the aftermath of the UK voting to leave the EU.
“The third strand of the Bank of England’s latest measures saw it announce that it will enlarge its Term Funding scheme with additional incentives for small and medium-sized enterprises (TFSME). The Bank of England had introduced the TFSME on 11 March, aimed at supporting bank lending, especially to small businesses.
“These moves were all taken with unanimous 9-0 votes within the Monetary Policy Committee (MPC).
“Following a special meeting on 10 March and the announced measures on 11 March, today’s actions by the Bank of England mark a second set of emergency measures, occurring between scheduled MPC meetings. Furthermore, the Bank of England had announced on 18 March that the joint Treasury and Bank of England Covid Commercial Financing Facility (CCFF) will provide funding to businesses by purchasing commercial paper of up to one-year maturity, issued by firms making a material contribution to the UK economy. The short-term debt issued by companies needs to be of investment grade, meaning it must have a high credit rating. The scheme will operate for at least 12 months and will be open to firms that can demonstrate they were in sound financial health prior to the shock. The Bank of England observed that it will help businesses across a range of sectors to pay wages and suppliers, even while experiencing severe disruption to cashflows. The Bank of England will create new money to pay the for the scheme, similar to its previous purchases of government and longer-term corporate bonds.
“Indeed, the fact that the Bank of England felt compelled to announce additional stimulative measures today – despite its regular March MPC meeting due to take place next Wednesday (25th) – highlights its concern over UK economic situation and outlook. It is also concerned over the recent marked rise in UK gilt yields amid tightening financial conditions and the plan to buy £200 billion more of gilts and corporate bonds is clearly aimed at tackling this.
“Specifically, the Bank of England’s statement accompanying its latest moves observed that the spread of coronavirus and the measures being taken to contain the virus will result in an economic shock that could be sharp and large, but should be temporary. The role of the Bank of England is to help to meet the needs of UK businesses and households in dealing with the associated economic disruption. The statement went on to comment that the MPC judged that a further package of measures was warranted to meet its statutory objectives. The statement noted that “Over recent days, and in common with a number of other advanced economy bond markets, conditions in the UK gilt market have deteriorated as investors have sought shorter-dated instruments that are closer substitutes for highly liquid central bank reserves. As a consequence, UK and global financial conditions have tightened”.”