Articles
19 March 2020

Bank of England goes all-in with rate cut and QE

The Bank of England has effectively gone all-in to help limit the damage. So, the focus is now back on the Chancellor, where there are likely to be further industry and worker support packages announced over the coming days. In the current market, which doesn't bode well for currencies with large funding needs, the outlook for GBP remains tricky 

The Bank of England has become the latest global central bank to announce further measures amid the widening virus shock.

Unsurprisingly, policymakers have cut interest rates to 0.1%, which represents a 15 basis point cut, and takes it to a level which the committee has long viewed the effective lower bound. Negative rates aren’t considered a viable tool in the UK, which is why the Bank has followed up with additional quantitative easing. Again while this will come as little surprise, the scale is probably larger than most had been expecting.

The Bank of England is effectively all-in, creating space for the Chancellor

The Bank has signalled it will increase its holdings of government and corporate bonds by a combined total of £200bn. Currently, the central bank maintains its government and corporate bond holdings at £435bn and £10bn respectively. According to our rates team, this could leave the Bank of England holding up to 38% of the gilt market, once the net supply is taken into account (and depending on what the ultimate split between government/corporate purchases is, although we'd expect the vast majority to be in gilts).

All of this follows the announcement of a commercial paper purchasing scheme earlier in the week, which is designed to keep the market for short-dated non-financial corporate debt functioning and prevent a wave of firms having to turn to the banks.

This all means the Bank of England is effectively all-in, creating the space for the Chancellor to announce further measures to help cushion the blow.

The Treasury has announced a large-scale package of loan guarantees, although the jury is out on how rapidly this will filter through and whether it will be enough to stop firms from taking imminent steps to downsize. One potential concern is that if the Covid-19 shutdown is perceived to be relatively long-lasting, then firms may also have limited willingness to increase debt considerably.

Ultimately none of this will, unfortunately, stop a UK recession, which like most of the developed world, now looks inevitable

With that in mind, the Chancellor has signalled that further measures are likely to be on their way for specific industries, as well as to provide further support for those self-isolating or unwell. The UK’s level of statutory sick pay is a little under 20% of average weekly earnings, which is substantially lower than elsewhere in Europe and doesn’t cover self-employed workers, signalling further support will be required.

Ultimately none of this will, unfortunately, stop a UK recession, which like most of the developed world, now looks inevitable. But the hope is that many of these measures can help limit the increase in unemployment, and foster a swifter and smoother recovery when the virus-shutdowns have passed.

GBP: Markets taking the glass half full approach to QE

GBP has reacted positively to the rate cut and QE announcement.

As for the rate cut, this was largely expected and so was the quantitative easing, hence the lack of negative GBP reaction. Although the QE may be seen as larger compared to initial expectations, given the bazooka delivered by the ECB yesterday (and the meaningful easing from the Federal Reserve too), the Bank of England's measures don't necessarily stand out as being too negative for GBP.

In fact, in an environment where major central banks are undergoing QE, and asset purchases are seen as at least partially helping the economy, this can help GBP short-term prospects a little bit.

As we mentioned yesterday in GBP: Feeling the pressure point, the GBP outlook remains tricky in the current falling markets, which doesn’t bode well for currencies with large funding needs – and GBP ticks the box. Unless markets calm down and as long as the dollar funding squeeze remains unresolved, the GBP/USD 1.10 level can't be completely ruled out.

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