CBI chief economist Rain Newton-Smith welcomed the cut in rates and said: “The Bank’s action will help restore confidence in the United Kingdom economy and what’s now most important to businesses is that the government develops a clear plan and timetable for European Union negotiations”.
Advertisement
Goldman Sachs, the investment bank, warned that its United Kingdom operations may have to be restructured following the vote.
It introduced in addition to the above a Term funding Scheme (TFS), it is probably the most innovative measure in the whole package and likely to be the most effective one for the real economy.
The main story dominating the market yesterday was the Bank of England’s decision to cut interest rates by 25bp to a new record low of 0.25%, and the launch of a massive stimulus package created to save the United Kingdom economy from recession.
But annuity rates have also plunged and savers’ plight will worsen if forecasts are correct and inflation goes to 2.4 per cent over the next two years. The markets have reacted more cautiously to sterling, especially to the announcement of an extra £60 billion of quantitative easing, and £10 billion more on corporate bonds, increasing the money supply forcing downward pressure on the pound. Also, the corporate bond purchase scheme may boost investor appetite for higher-yielding securities, but United Kingdom corporates have little need to raise significant new debt, overall lower funding costs will be less of a factor for corporate credit profiles, than weak growth and sterling depreciation. Also, while he wouldn’t rule out the BOE expanding the range of assets it buys beyond government and corporate bonds to securities such as exchange-traded funds, he declined to speculate.
“I do think it is a material risk but it is not qualitatively something we haven’t done before”.
Daniel Mahoney, head of economic research at Centre for Policy Studies, said: “The Bank’s further loosening of monetary policy could prove problematic for the United Kingdom economy”.
Finance minister Philip Hammond said on Thursday the government and the BoE had all the tools they needed, and that he would review the government’s policy stance when he gives a mid-year budget update later in the year. The TFS is now calibrated to accommodate rates at 0.25 percent, and will have to be adjusted if the BOE’s benchmark was taken lower, Broadbent said.
HSBC said it was to pass on the base rate cut to customers on its tracker mortgage from Friday, and extend savings to standard variable rate (SVR) mortgage borrowers from the beginning of September.
It depends on which paper you read this morning, but there is no getting away from the UK’s first interest rate cut since 2009.
Meanwhile, Michelle McGrade, chief investment officer of TD Direct Investing, described the rate cut as a step in the wrong direction if “instilling confidence in the economy and markets” was the central bank’s objective.
“Is obvious the world is now buying central banks rather than the fundamentals attached to the economies”, Lowman said.
The scheme would need to be retooled if the central bank cut rates closer to zero, he added.
Advertisement
He said that those plans would be set out in the Autumn Statement. While they discussed taking rates lower, “there wasn’t a huge amount of debate about what that lower bound now is”, he said.
