Slightly less ‘hot on the heels’ of the Federal Reserve (Fed) cut in rates on 3 March, the Bank of England (BoE) announced an emergency rate cut of 0.5% to 0.25% on 11 March, back down to the post-Brexit referendum lows briefly reached in 2016 / 17. Additional measures announced include a new four-year ‘term funding scheme’ for small and medium sized companies that the BoE expects will amount to an additional GBP 100 billion in term funding. Importantly, the ‘countercyclical capital buffer’ – a cushion that banks must hold in extra capital to absorb potential losses – has had its restrictions loosened. This could provide additional lending of GBP 190 billion to businesses this year, almost 13x higher than net lending last year.
Usually rate cuts would see sovereign bond prices rise (prices fell following the rate cut decision) and the currency fall (sterling initially strengthened). The expectation of an emergency cut by the BoE following the Fed’s actions last week was clearly priced in, so the additional lending actions can be taken as the first knock-out stimulative punch to the economy. Also market participants are front running an expected second knock-out punch from the government budget, also on 11 March. This bank jab and government uppercut is the coordinated palliative care that the economy will need once the slowdown effects of the now endemic coronavirus are felt and goes a long way to ensure we do not have a credit crisis, which helps explain the positive initial response of sterling.
Carney and his successor Andrew Bailey, who takes over as BoE governor on 17 March, both stressed and kept repeating that the measures taken today were a “big package”. For borrowers yes, but not for savers. We remain stuck in this seemingly eternal low rate environment.