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Bank of England joins in with emergency measures

11 March 2020
4 Minute Read
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The Bank of England this morning announced several measures to help businesses and households in the likely upcoming disruptions relating to the spreading of the Coronavirus:

  • The Bank of England Monetary Policy Committee (MPC) voted unanimously to cut the base rate by 0.5% to 0.25%. The pace of asset purchases was kept unchanged.
  • The MPC is introducing a new Term Funding Scheme for Smaller and Medium-Sized Enterprises (TFSME), which aims to render monetary policy more effective via a direct transmission mechanism to the real economy. Over the next 12 months, this scheme will offer 4-year funding covering at least 5% of real economy lending. Extra funding will be available to banks that are increasing lending.
  • The Financial Policy Committee (FPC) also reduced capital requirements for banks by cutting the countercyclical capital buffer to 0% from a previous level of 1%, which was actually due to increase to 2% this year.

Why have they done it?

The Bank of England’s rationale for these moves could not be clearer:

“Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months. Temporary, but significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for short-term credit from households and for working capital from companies. Such issues are likely to be most acute for smaller businesses. This economic shock will affect both demand and supply in the economy.” (Source: Bank of England)

 

What do we think?

It is positive that the Bank of England added a specific funding scheme to allow monetary policy to be more effective in the short term and ensure that financial conditions remain favourable for businesses and the banking sector. As credit spreads have recently spiked up, the announced scheme should prove timely and effective.

As we wrote in a flash last week when the Fed cut rates, it may feel like “too much too soon” at first sight but only time will tell. There is little ammunition left for most western central banks at such low rates and central bankers have indicated willingness to be proactive rather than risk being reactive with too little ammunition too late. The actions from the Bank of England are consistent with what other central banks globally have done, such as the Fed’s 50bps rate cut last week. We note that the ECB meets tomorrow and that the Fed is meeting next week as well, with more accommodative policies expected by the market on both sides of the Atlantic. Governments too have started to announce supportive measures globally as we may hear later today as the Chancellor announces the budget.

With bond markets already pricing in such rate cuts, gilt yields are barely unchanged at the open, with the pound basically unchanged against the euro at the time of writing. Equity market strength this morning is driven by more global factors, but both intra and inter day volatility remain extremely high.

The Investment Office