*All market data and rate references as of Friday 20 March, 2020*
Yesterday saw yet another emergency rate cut from the Bank of England, taking the Bank Rate to 0.1% - its lowest level in the institution’s 326-year history. At the same time, the Bank announced that it would carry out a largescale expansion of its quantitative easing programme, purchasing an additional £200 billion of government and corporate bonds.
Given that the headline rate cut was relatively minor, down only 0.15% from a previous level of 0.25%, the second measure is likely to be the more significant one. With short term interest rates already so close to zero, there is limited evidence that further cuts feed through to the real economy and actually lower borrowing costs. This is one reason why the previous governor, Mark Carney, consistently stated that he considered the lower bound for UK interest rates to be “close to, but not at” zero. Meanwhile, economists estimate that the expansion of quantitative easing is equivalent to a further rate cut of 2%.
Despite the dramatic headlines, the announcement appeared to be intended to act as a confidence signal rather than a market mover. Consensus is that the best way to support the economy now is through fiscal stimulus and expansion of SME lending programmes, with monetary policy playing a more limited role.
That is just as well, because the reaction from the market ended up being somewhere between confusion and ambivalence. Counterintuitively, sterling swap rates initially rose after the news, before falling back to end the day roughly where they had begun it. Sterling itself enjoyed a brief rally before dropping back below 1.15 against the US dollar – although another bounce early this morning, during Asian trading hours, sent it above 1.18.
None of this necessarily means that monetary policy has reached the limit of its effectiveness. The debate around the use of “helicopter drops” of direct money printing, to fund Treasury activities, has grown particularly loud. But it is clear that markets no longer seem to know exactly what to make of central bank announcements. That is a warning sign.
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