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As expected, the Bank of England’s MPC announced a 0.25% base rate cut (to 0.25%) following its meeting this morning. In addition, it also announced that it was reviving its QE programme with the purchase of £60bn of gilts, a slightly larger amount than had been expected. A number of other initiatives were also presented. They included the purchase of up to £10bn of UK corporate bonds and the launching of a Term Funding Scheme (TFS).
The purchase of corporate bonds is a new departure - designed to directly support corporates and, the MPC hopes, to bring down the spread they currently bear over gilts. The case for a return for further QE seemed rather less apparent. Given that 10 year gilts were trading at about 0.75% prior to the announcement it is difficult to tell how this new tranche of QE will ‘lower….. the cost of borrowing for households and businesses’. It should, however, provide good support for asset bubbles. Interestingly, three MPC members failed to approve the return to QE whereas all but one supported the new proposal to buy corporate bonds.
The TFS would appear to be the reappearance/rebranding of the previous Funding for Lending scheme. Details will be announced later, but one assumes that it will be aimed at medium sized corporates and SMEs. The basis is that TFS will provide funding to banks at close to base rate as long as the reduced rate is passed on the borrower. Mark Carney was at pains at this morning’s press conference to emphasise that this was not a giveaway to the banks but, like the Funding for Lending scheme, the amount of usage that TFS will generate is not likely to be too great if the banks are not incentivised to sell it.
While nobody doubts the intention of this morning’s package is laudable, it is difficult to see how it is likely to provoke anybody into launching a major investment plan that was not already in the pipeline. The impact on the wider economy, therefore, is likely to be very limited. One question put to Carney at the press conference this morning was what he would advise to pensioners surviving on the interest from their savings - ouch, followed by squirm.
All views expressed here are the author’s own and are based on information and data available at the time of writing.
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