BoE pull-out all stops – AGFxC

Greg Gibbs, Director of Amplifying Global FX Capital, suggests that in contrast to the limited action by the BoJ last week, the BoE has been able to engineer a surprise easing by including a sizeable QE element with its rate cut that was not widely expected and opening the door to slice rates closer to zero.

Key Quotes

“They cut the base rate by 25bp to 0.25%, a new record low, expanded purchases of government bonds by GBP60bn and corporate bonds by GBP10bn to a total GBP435bn, and introduced a new Term Funding Facility.

It acknowledged that the fall in GBP was forecast to push inflation above the 2% target in the near term, “probably causing it to rise above the target in the latter part of the MPC’s forecast period.”  But indicated it was prepared to look through this rise as temporary.  By putting growth ahead of inflationary concerns, the BoE may lower perceived real interest rates further than the nominal fall in yields.

Furthermore, the BoE statement said a majority of members expect to slice rates further, close to zero “during the course of the year”, and reinforced the easing measures by stating they can ease further across all dimensions.

However, it said, “The MPC currently judges this bound [for the policy rate] to be close to, but a little above, zero”.  The committee were also not unanimous on the need for more QE, eight of nine supported the introduction of corporate bond purchases and six supported further government bond purchases.

Finally, the BoE statement reminded the market that it had already taken some measures, reducing the countercyclical capital buffer, exclusion of central bank reserves from the leverage ratio calculations, and continued to provide additional term liquidity support.

Indeed, the BoE has pulled out all stops to add additional stimulus and it has had a significant impact on financial markets.  2yr swap rates fell 8bp and 10 year gilt yields fell 16bp to a new low, noticeably diverging from the rebound in Japanese yields and drift up in global yields since the limited BoJ policy easing on 29 July.

And despite the already deep slide in the GBP since the UK referendum, the BoE has succeeded in maintaining downward pressure on the GBP.  The weak currency, one of the few to be weaker than the USD this year, is further enhancing the effectiveness of the BoE monetary policy easing.”