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UK Rate Cut Decision

Bank of England delivers the first rate cut in 7 years

The Bank of England has delivered a 0.25% cut in Base Rate to 0.25%, as expected.

This is the first cut in Base rates since 2009. This is an emergency measure to counter the expected “Brexit” related slowdown. The Monetary Policy Committee’s (MPC) vote in favour of the rate cut was unanimous.

The Bank expects unemployment to rise to 5.5% from 4.9% by 2018 whilst inflation is also expected to be around 2.4% over both its 2 and 3 year forecast horizon. GDP growth is expected to be 2.5% lower than previously forecast.

Term Funding Scheme

In order to assist banks, the Bank of England has introduced a new Term Funding Scheme (TFS) which will provide funding for banks at close to 0.25%.

£60bn of addition gilt purchases

The Monetary Policy Committee (MPC) voted 6-3 to increase its gilt holdings. The Bank will increase current holdings by £60bn of additional gilt purchases to £435bn from current holdings of £375bn. The purchases will be made from the “issuance of central bank reserves” (a euphemism for money printing) or “quantitative easing”.

£10bn of sterling corporate bond purchases

The Monetary Policy Committee (MPC) agreed 8-1, to launch a programme for buying UK corporate bonds. The Bank of England will start buying UK corporate bonds up to £10bn in value. The Bank has not provided details on whether these will be investment grade (we assume it will be).

Conclusion

The markets had expected the quarter point rate cut which will lower floating rate mortgage costs to the extent that the cut is passed on. The Bank has not provided “guidance” on how long the current monetary environment will remain in place though the yield curve suggests the current rate will be here for at least 12 months.

The £60bn extension of the gilt buying programme is a prudent move that could underpin gilt yields (already near record lows – 10 year yields are just 0.91%). Our expectation is the Bank will focus the purchases at the short end of the yield curve where there would be limited sensitivity.

By embarking on a corporate bond purchase scheme, (a move currently undertaken on a larger scale by the ECB) the cost of issuing new bonds will reduce helping businesses refinance and invest new funds.

Notwithstanding the Bank’s moves were broadly expected, sterling has moved sharply lower against other major currencies, dropping to US$1.312 and €1.1795.

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