In search of a boost?
Source: Financial Express Analytics
Since the collapse of Lehman’s back in the September 2008, interest rates have been cut by a total of 3.5 per cent. We are almost dancing in the same territory as the US, where rates are also at an all-time low range of 0 to 0.25 per cent. Indeed, we believe that the Bank of England will probably follow the US’s lead and become zero-bound over the coming months. For now, that makes sense: short-term inflation pressures are easing, and there’s capacity in the system. Furthermore, dire GDP figures point to the need for more policy support. Interest rate cuts alone are proving meaningless in kick-starting lending and consumer interest. Mortgage data remains depressed and a bleak unemployment picture does not bode well for encouraging household spending.
The shift of focus from the price of money to the volume of money in the system – so called, ‘quantitative easing’ – is therefore timely. The government has just elucidated its £50bn asset purchase facility. The facility targets high quality commercial paper, corporate bonds, paper issued under the Credit Guarantee Scheme (CGS), syndicated loans and asset-backed securities.
However, the key point is the government is not just buying commercial paper from the secondary market but also direct from issuers (primary market) – in other words, UK Plc. The proof is in the pudding, but on the surface this appears a more thorough way of unfreezing bank lending. It might be necessary for the Bank of England to reduce longer-term rates of interest to zero to make this quantitative easing more effective. The bottom line is the wheels are in motion, but the Bank’s job is far from done.
Julian Chillingworth is chief investment officer at Rathbone Unit Trust Managers. The views expressed here are his own.