- No further action from the Bank of England at the scheduled March Monetary Policy Committee (MPC) meeting. This was widely expected following the central bank delivering substantial stimulus in two emergency actions on 11 March and 19 March.
- These two emergency actions have seen the Bank of England bring interest rates down to a record low of 0.10% (from 0.75%), reviving Quantitative Easing by announcing it will buy £200 billion of government and corporate bonds (taking the total up to £645 billion) and launching and then enlarging a Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME).
- Highlighting the strength of the action being taken by the Bank of England, the £200 billion of extra asset purchases announced dwarfed the previous highest single purchase announcement of £75 billion. Furthermore, the Bank of England stressed that these purchases would be front-loaded as much as possible to increase its effectiveness in counteracting a tightening of monetary and financial conditions.
- The minutes of the 25 March MPC meeting made it clear that the committee is ready and willing to take further supportive measures should economic circumstances or financial market conditions warrant.
- EY ITEM Club believes future Bank of England stimulus is highly likely – possibly at its May meeting. This is most likely to be in the form of more asset purchases.
- EY ITEM Club doubts the Bank of England 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. In particular, the Bank of England is concerned about the potential impact of negative interest rates on the profitability of the UK banking sector.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
Following its latest emergency action on 19 March, the Bank of England made no further changes to monetary policy at the regular Monetary Policy Committee (MPC) meeting that was held on 25 March. There was a 9-0 vote by the MPC on all of its decisions.
The Bank of England released the minutes of both the 19 March and 26 March MPC meetings.
On 19 March, the Bank of England cut interest rates by 15 basis points to 0.10% from 0.25%, taking them down to the lowest ever level. This cut came only eight days after the Bank had cut interest rates by 50 basis points to 0.25% from 0.75%. The Bank of England 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. This is by far the largest single announcement of asset purchases that the Bank of England has ever announced (the previous highest was £75 billion). 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 on 19 March 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).
The minutes of the 19 March MPC meeting highlighted the recent dislocations in global financial markets and the tightening in financial conditions. It observed that conditions in the UK gilt market had deteriorated substantially as investors had sought shorter-dated instruments that were closer substitutes for highly liquid central bank reserves. Corporate bond spreads had also widened materially. Volatility in stock markets had risen to historically elevated levels and equity prices had fallen significantly further. Sterling had depreciated sharply.
The minutes also observed that while there was little evidence to assess the economic shock from coronavirus, the MPC judged that activity had fallen markedly in the domestic economy in recent weeks, as well as globally.
Consequently, the MPC judged that a further comprehensive package of measures were warranted to support UK businesses and households through a sharp but ultimately temporary reduction in activity, and so help to prevent a temporary disruption from causing longer lasting economic harm. The MPC considered that an increase in the Bank’s gilt purchases would help improve the functioning of the gilt market and help to counteract a tightening of monetary and financial conditions. The MPC believed there was a strong case to make the new asset purchases at a markedly higher rate than in previous programmes. Front-loading purchases, as much as was operationally possible, was seen as increasing the effectiveness of the policy in counteracting an unwarranted tightening of monetary and financial conditions.
Additionally, the MPC considered that a cut in interest rates to 0.10% from 0.25% would help to support business and consumer confidence, to bolster the cashflows of businesses and households, and to reduce the cost, and improve the availability, of finance.
The minutes of the 25 March MPC meeting made it clear that the committee are ready and willing to take further supportive measures should circumstances warrant.
The 25 March minutes observed that given the major recent steps taken by the Bank of England, there was “not a strong case for further policy changes at this meeting”. It noted that gilt yields had fallen significantly following the previous week’s special MPC meeting and the commencement of additional gilt purchase operations from 20 March. It notably commented that “If needed, the MPC could expand asset purchases further”.
The minutes concluded that the MPC would continue to monitor the situation closely and, consistent with its remit, stood ready to respond further as necessary to guard against an unwarranted tightening in financial conditions, and support the economy.