Spread betting and trading on forex and equities – what we learned from the Bank of England

The Bank of England delivered a triple-whammy of easing measures on Thursday, delivering a boost to equities and sending the pound lower. So just what did the central bank unveil and what’s going to be the impact?

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Key Points


Interest rates: Cut by 25 basis points from 0.5% to 0.25%

Quantitative easing: Expanded by £60bn, including £10bn of corporate bond purchases

Term Funding Scheme: A new souped-up version of Funding for Lending to deliver loans to households and businesses.

Whatever It Takes

 

It wasn’t quite the kitchen sink, but it was a very strong, mutually-supportive, package of measures unveiled by the Bank of England. Mark Carney went as far as to say that the Bank would do whatever it takes to meet its goals.

The statement from the Bank said members of the MPC think rates could be cut again if the economic data is consistent with the August inflation report.

Inflation: Relax

 

Inflation expectations are rising – but the BoE seems happy to tolerate this potential overshoot in the short-term in order to boost demand now. A weaker pound is clearly going to impact on import prices.

“Given the extent of the likely weakness in demand relative to supply, the MPC judges it appropriate to provide additional stimulus to the economy, thereby reducing the amount of spare capacity at the cost of a temporary period of above-target inflation,” said the Bank in its accompanying statement.

“Not only will such action help to eliminate the degree of spare capacity over time, but because a persistent shortfall in aggregate demand would pull down on inflation in the medium term, it should also ensure that inflation does not fall back below the target beyond the forecast horizon.  Thus, in tolerating a temporary period of above-target inflation, the Committee expects the eventual return of inflation to the target to be more sustainable.”

What Recession?

 

Talk of a recession may have been premature – at least according to BoE’s forecasts. It anticipates 2% growth in 2016 – albeit that means virtual stagnation in the second half. For 2017, it’s slashed its forecast from 2.3% to just 0.8%.

No Excuses, Banks

 

 “Banks have no excuse for not passing on this rate cut,” warned Carney. But with lenders squeezed on all sides – not least by super-low interest rates compressing margins – this may be easier said than done. One report released ahead of the decision warned of a £1.4bn shock to UK banks’ operating profits.

A new scheme – Term Funding – will ensure that banks pass on loans to consumers and businesses at, or as close as possible to, the bank rate.

No Negative Rates

 

"I am not a fan of negative interest rates... We have other options to provide stimulus", said Carney, adding that he doesn’t see a scenario for even discussing negative rates.

Certainly the experience from the Eurozone and Japan of negative rates has not been entirely positive. ZIRP maybe, but never NIRP.

Over to You, Phil

 

As ever, it’s not just up to central banks to stimulate economic growth; and the Bank of England reiterated that monetary policy is just one tool. Has the baton been passed to the government? It’s too early to say if fiscal stimulus is on the way but with chancellor Philip Hammond saying policy could be “reset” in the Autumn Statement, there is a chance of coordinated stimulus action.