Firstly, the Bank of England announced a rate cut for the first time since 2009 and launched more than the expected scale of QE on 4th August. Neither EconoTimes nor its third party suppliers shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance thereon.
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Stronger-than-expected July jobs data released on Friday has raised expectations that the US central bank will raise rates again this year.
Although this has worked to a certain extent in the United Kingdom, the problem with the first option is that total calculations show it’s a zero sum game. The BoE’s moves represent another incremental step by developed world central banks to provide sufficient stimulation.
With the Bank of England now joining the bond purchasing spree, the additional accommodative measures will likely add further pressure on global borrowing costs, potentially supporting Treasuries and corporate bond exchange traded funds as worldwide investors look to USA debt as a more attractive source of yields.
This is because as bond interest rates have gone surely and steadily downward for a decade, to zero and below, and to near zero even for the bonds of large corporations, the market “price” of those bonds has just as surely and steadily increased, making a ideal speculative market “outside the economies”. One crucial factor is that the BoE has indicated the bond purchases will last for 18 months, while those of public debt will be for six months, which means it acknowledges the impact they will have on liquidity.
By mid-afternoon on Tuesday, the pound was down 0.53% against the dollar and 0.38% lower against the euro – exchanging hands at $1.2969 and €1.1706 respectively.
Last Thursday, the Bank’s Monetary Policy Committee made a decision to cut the base rate of interest by a quarter of a percentage point, bringing it down to 0.25%.
What else can the BoE do?
Will we see negative rates in the UK? The additional purchases are due to be completed in six months.Bank of England policy maker Ian McCafferty said the central bank should follow a gradual approach in how it responds to Brexit given that information on the United Kingdom economy’s exact reaction to the vote “is still very limited”. “It was an extensive stimulus program that the BOE announced”. And it seems unlikely that any BoE he is chair of could credibly impose a negative rate. However, in the event the monetary stimulus measures fail, a better option to boost the economy would be for the BofE to embark on a budgetary stimulus programme. We can expect industrial production, retail sales, trade, and inflation to be released during the week, while credit and money-supply data may also come out. That said, it is too early to start talking about helicopters throwing money down from the sky and the like.
The Bank of England are well aware that their first experiment with QE was a cash cow for the wealthiest individuals in society to milk, and that very little of it ended up directed towards economically beneficial stuff like infrastructure investment, industry, house building, education, research and development. yet they’re doing more of the same.
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In reality, while the benefits of a 0.25 per cent cut in base rate are minimal to the majority of businesses, the resulting reductions in savings rates could well cause hardship for pensioners, many of whom rely on income from savings to survive.
