The Bank of England’s latest emergency rate cut has been interpreted by market commentators as a largely symbolic gesture, although the decision to significantly expand its quantitative easing programme has been applauded.
With the coronavirus outbreak (as referred to as Covid-19) threatening to push the global economy into recession, central banks have been busy loosening monetary policy through rate cuts and asset purchases. Close to 60 rate cuts have been carried out in 2020 so far.
Yesterday saw the Bank of England slash the base rate to a record low and announce further monetary stimulus for the second time in little over a week, following its first move on Tuesday 11 March. At that time, the Bank took rates from 0.75 per cent to 0.25 per cent and launched a new term funding scheme for small- and medium-sized enterprises; this came just before a £330bn fiscal boost from the chancellor.
On Thursday 19 March, a second emergency rate cut was announced. This took the base rate to a new historic low of just 0.1 per cent and came alongside plans to buy £200bn of government bonds and non-financial investment-grade bonds.
In a statement, the Bank said: “The spread of Covid-19 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.”
Bank of England base rate
Source: Bank of England
Tom Stevenson, investment director for personal investing at Fidelity International, said taking the base rate to “a whisker away” from being negative and ramping up bond purchases is “a desperate measure for a desperate situation”.
“Both governments and central banks have quickly acknowledged that we face a sharp downturn,” he added.
“The question now is whether the Bank’s assumption that the hit will be temporary is correct. It could be. The infrastructure of global supply remains in place and global demand should bounce back quickly once the outbreak passes.
“Attention now shifts to the US. If this becomes the new epicentre then we can expect a further leg down for financial markets but if the outbreak can be contained and monetary and fiscal measures take effect at pace then there is scope for a stabilisation. The Bank is right to throw everything at this.”
Craig Erlam, senior market analyst at OANDA Europe, said the Bank has “thrown the kitchen sink” at coronavirus but is doubtful of how much impact the 15-basis-point rate cut will have in reality. He has more faith in the impact of the extra £200bn in QE, which takes the programme up to £645bn.
“The rate cut is largely symbolic and highlights just how little room the Bank has to manoeuvre on the traditional side,” he said.
“The biggest impact has come in government bonds, where the BoE stated it will focus much of the new asset purchases, with the program increased by almost 50 per cent. This should alleviate some of the pressure that's built in the aftermath of the UK government’s huge stimulus plans which will flood the market with new debt.”
The £200bn in new asset purchases is almost three times larger than the size of the Bank’s previous biggest QE announcement, as illustrated by Pantheon Macroeconomics in the below chart.
Thursday’s QE announcement dwarfs those in the past
Source: Pantheon Macroeconomics
Karen Ward, chief market strategist for EMEA at JP Morgan Asset Management, welcomed the move, saying: “In our view it is the additional quantitative easing in today’s Bank of England package that will have the most significant impact, both in terms of the market reaction, but also a solution to the economic challenges presented by the Covid-19 virus.
“The support to the economy and health system will require vastly higher government borrowing. The central bank showing willing to buy government debt will ensure the market can absorb this additional issuance without undue stress.”
David Page, head of macro research at AXA Investment Managers, was anticipating the Bank to lower interest rates to this level and to restart its QE programme, but was “surprised” by the move yesterday and said the scale of the planned asset purchases “was a little larger than expected”.
AXA Investment Managers believes that the combined effect of the Bank and Treasury’s stimulus measures will add around 4-5 per cent to UK GDP. “The scale of stimulus is indicative of the scale of economic disruption expected over the coming quarter particularly,” Page added.
Both of the recent rate cuts took place after emergency meetings of the Bank’s Monetary Policy Committee (MPC), which is due to convene for its next scheduled meeting on Thursday 26 March.
However, Page does not believe that much, if any, further monetary policy action will be announced at this meeting – although the option remains on the table for the future.
“For now, our expectations are that the MPC has delivered most of the monetary policy stimulus and we do not necessarily expect further easing next week,” he said.
“That said, the MPC will be mindful of problems in financial market liquidity and we would not be surprised to see more technical measures enacted if liquidity scarcity persists over the coming days. Moreover, with risks to the economic outlook continuing to lie to the downside, we expect further monetary policy stimulus – primarily through additional QE – over the coming months.”
Helal Miah, investment research analyst at The Share Centre, agreed that the scale of the Bank’s action shows how seriously it considers the economic threat from the coronavirus outbreak.
At 0.1 per cent, the base rate is lower than it was during the global financial crisis, which signals “how deep the repercussions [of coronavirus] could be in the eyes of the central bank”.
But he warned that monetary policy will do little to improve the day-to-day reality of coronavirus and called on the government to do even more to tackle its fallout.
“This rate cut will do nothing in slowing the spread of the disease which is more dependent on the government’s measures. It may also be little comfort for small businesses facing an Armageddon scenario and may do little to stop job losses racking up,” Miah said.
“However, the BoE’s actions that are coordinated with government strategies to prevent job losses will do much to prevent a dire economic situation after the virus disappears. In this regard we need to see more action from the government to support the Bank of England’s effort, such as the discussions in the market along the lines of policies preventing firms from laying off employees.“Although volatility has been extreme the movements of the last few days suggest to me that the market is trying to fix a bottom for the time being, this does not necessarily mean that we have reached a bottom. We are yet to face the horrible economic data that is to come in the next weeks and months.”