“Markets largely got what they wanted from today’s Bank of England (BoE) rate decision: the first cut rate in seven-years, a £60bn reigniting of QE and a new £10bn corporate bond buying programme. The surprise in the announcement was the Term Funding Scheme, which looks like a recasting of Funding for Lending. With up to £100bn available, it is designed to provide additional lending power to the banking sector without damaging margins. Potentially, does this amount to a guarantee of bank margins? Attention will focus on the detail of this programme when they emerge.
As a result of these actions, markets duly danced to the new stimulus package tune with sterling and gilt yields falling and the stock market rallying. Evidence of weak growth post the Brexit vote was the justification, though doubts remain if the gloomy survey data will be fully reflected in the subsequent real world outcome. Previous long-range forecasts from the BoE have proven wide of the mark and we may well find that today’s preventative medicine is driven more by the need to be seen to be acting than certainty on a poor economic future for the UK.
“While markets may cheer, savers and pension funds will groan at the further erosion of already meagre cash and fixed income returns which have seen pension funds' deficits rise sharply this year already. After a period of reflection, markets may well return to fretting about the long-term consequences of enduring unconventional monetary policy, and may even start to worry if the UK is set to follow the Eurozone and Japan down the rabbit hole into negative interest rates. In the end, monetary coercion cannot be the sole basis for long-term economic success.”