At midday today, Bank of England governor Mark Carney announced that the base rate will be slashed in half to a new historic low of 0.25 per cent.
While this was largely expected by markets, it came as a surprise to some that the UK’s quantitative easing programme would be expanded by £60bn to £435bn. What’s more, the Bank of England will be able to purchase up to £10bn of UK corporate bonds.
Another announcement from today’s ‘Super Thursday’ was Carney’s initiation of a Term Funding Scheme (TFS), which is designed to encourage banks to lend through a period of low interest rates.
The governor says the Bank of England’s decision to loosen policy further is due to the UK’s decision to leave the European Union and the fact that the country’s openness to the movement of “goods, services, people and capital” will have to be redefined.
“To be clear, the future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policymakers. We cannot immediately or fully offset the economic impacts of a large structural shock. However, monetary policy can support the necessary adjustments of the UK economy during a period of heightened uncertainty.”
In the below article, we take a look at the thoughts of some of the industry’s leading commentators on the matter.
A “Goldilocks dose of stimulus” or a “panicked reaction to a political event”?
In terms of the economic outlook for the rest of the year following Carney’s announcement, opinion is definitely mixed. While many will breathe a sigh of relief that the Bank thinks growth is set to remain low and a recession is highly unlikely, others warn that the continuation of loose monetary policy could create a credit build-up over the long term.
Ollie Russ, manager of Liontrust European Income and European Enhanced Income funds, warns that a more cautious stance from the Bank of England may have been more appropriate given the uncertainty surrounding a post-Brexit economy.
“We have not yet seen the chancellor’s fiscal response to Brexit and the Bank is responding to its own forecasts, which at this stage are probably best classified as ‘guesses’,” he said.
“What impact the new QE will have is debateable, but there is a risk it looks like a panicked reaction to a political event rather than a measured response to an economic one.”
Nicholas Wall, portfolio manager of the Old Mutual Global Strategic Bond fund, describes the Bank of England as “wielding a sledgehammer to curb Brexit risks”.
“The Bank clearly felt that it had nothing to lose by delivering more than expected and weakening sterling further, attempting to raise inflation and nominal GDP,” he said.
“Further down the line we expect far closer cooperation between the central bank and government – as this current monetary policy framework reaches its limits, we could creep towards expansionary policy funded by money creation. November’s meeting, when the BoE’s next Inflation Report is released, could shape up to be very interesting.”
ETX Capital’s Neil Wilson adopts a far more positive view on the prospect of further quantitative easing and the halving of the UK’s base interest rate.
“We got a Goldilocks dose of stimulus from the Bank of England today, not too dovish and certainly not too hawkish,” he said.
“Buying more government bonds could be the green light for new chancellor Philip Hammond to deliver his ‘reset’ of fiscal policy. It makes some degree of fiscal stimulus more likely in the Autumn Statement.”
“The inclusion of corporate bonds in the QE programme is a lot more noteworthy. It’s going to deliver another sugar rush for the FTSE 100 and it’s no doubt going to spur additional borrowing by investment-grade companies who can then use the funds to finance share buy backs. The weaker pound is also good news for the blue chip index, as earnings predominantly come from abroad.”
What will the impact be on investors?
When it comes to the impact that the Bank of England’s monetary policy will have on investors, a number of industry professionals believe that there are areas of the UK market set to benefit from the changes.
Colin Morton, lead manager of the Franklin UK Equity Income and Franklin UK Rising Dividends funds, says the immediate boost the blue-chip index has received following the news is to be expected.
Performance of FTSE over 1day
Source: Google Finance
“In an even lower interest rate environment, equities look ever more attractive compared to bonds and cash. This is compounded by the fact that – with a government aim to buy back more corporate bonds – the cost of capital for companies is becoming cheaper, meaning there should be more money available for corporates to invest,” he said.
“The news has also sparked a further weakening of the pound, meaning that those companies with defensive, overseas earnings and attractive dividend yields, such as Unilever, British American Tobacco and Imperial Tobacco, are seeing benefits this afternoon.”
FE Alpha Manager Ian Spreadbury, who runs a number of portfolios including Fidelity Moneybuilder Income, says the Bank of England’s announcement has reinforced his base case for a high- risk, low inflation and slow growth environment.
“We plan to continue our long-held focus on high conviction credits, with a bias to non-cyclical areas, secured asset-backed bonds, and a good liquidity buffer for ballast in an ever more uncertain and volatile market,” he said.
Nancy Curtin, CIO at Close Brothers Asset Management, says the Bank of England’s “double dose” of stimulus as well as rate cuts will put investors’ minds at ease. However, she warns that monetary policy cannot do “all the heavy lifting” and, as such, the market will turn to fiscal policy to bolster growth in today’s uncertain environments.
“Markets began pricing in an easing of monetary policy as soon as the referendum result became known, but we expect bond yields to fall further following today’s stimulus.”
Performance of gilt yields over 10yrs
Source: FE Analytics
“Investors need to consider the price they are paying for safety, and the diminishing returns on offer,” she warned.
“The surprise in the announcement…”
While the slashing of interest rates and the expansion of QE may have been predicted by some, the creation of the Term Funding Scheme was perhaps more unexpected.
Eric Lonergan, macro investment fund manager at M&G Investments, said: “The cut in base rates and the new QE programme are a sideshow. The new Term Funding Scheme is extremely important. In one small move, Carney's BoE has opened up the possibility for much more aggressive easing in future.”
“There are now TWO important policy rates in the UK: base rate and the interest rate at which the Bank of England lends under its TFS programme. Currently the two are the same, this is already a major break with history, when the Bank only lent directly to banks at penal interest rates. In future, there is no reason why the BoE cannot continue to cut the TFS rate and leave base rates unchanged. In other words, there is no lower bound to the interest rate on TFS.”
“In conclusion, this is a far more important BoE decision than it first appears. Carney has very cleverly made some conventional headline changes, while disguising a potentially radical new tool. No one can now say the BoE is out of ammunition.”
Andrew Parry, head of equities at Hermes, said: “The surprise in the announcement was the Term Funding Scheme, which looks like a recasting of Funding for Lending.”
“With up to £100bn available, it is designed to provide additional lending power to the banking sector without damaging margins. Potentially, does this amount to a guarantee for bank margins? Attention will focus on the detail of this programme when they emerge.”
Which funds are set to benefit from this environment?
Adrian Lowcock, investment director at Architas, says that there are a number of ways investors can benefit from lower interest rates.
The fact that the move is likely to weaken sterling further means contrarian manager Richard Buxton’s Old Mutual UK Alpha fund, which has a heavy exposure to international-facing sectors like oil and healthcare, could do well due to the currency shift.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Darius McDermott, managing director of Chelsea Financial Services, says that corporate bonds and bond proxies are set to do well as a result of the Bank of England’s loose monetary policy.
"Funds that should do well in this environment include Evenlode Income, Standard Life Investments Global Equity Income, Royal London Corporate Bond and MI TwentyFour Dynamic Bond," he said.
“Another hammer blow for savers and pensioners”
While many industry commentators can see opportunities for investors, they are far from optimistic in terms of how the rate cuts and expansion of QE will benefit savers, pensioners and millennials.
Richard Stone, CEO of The Share Centre, said: “The interest rate cut also does nothing for millennials (Generation Y or those born since the 1980s) as they try to establish their financial security.”
“Reduced rates and increased quantitative easing bolster asset prices by encouraging cash savings to switch into risk assets as noted above. This boosts the prices of shares, the values of property and other risk assets by increasing demand.”
“It does nothing for those yet to get a foot on that asset ladder and whose initial cash savings will now earn less or nothing at all. This will further exacerbate financial and intergenerational divides in society.”
Nigel Green, CEO and founder of the DeVere Group, says that many people rely on income from their savings to top up their pension income but have been hit by monetary policy both in terms of their savings and their pensions.
“By pulling the trigger and cutting interest rates for the first time in seven and a half years today and boosting QE, the Bank of England has delivered yet another painful bloody nose to pensioners and savers,” he said.
“This really is a toxic combination for millions of people who rely on pensions and savings.”