Interest Rate Decision – More industry comment

by | Aug 4, 2016

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Andrew Wilson, Head of Investments at Towry:

“Cutting from 50bps to 25bps will be unlikely to make much of a difference to anything, and of course you can’t force people to borrow. That said, there may be some psychological benefit in the sense that the Bank of England is alert to the current economic dangers, and is being proactive, as further evidenced by the additional “QE”.

“The expansion of QE was not a unanimous decision, even though the Monetary Policy Committee had also slashed forecasts for GDP in 2017. A new “funding for lending”-type scheme was also announced, so Mark Carney is certainly getting his shots way, and Chancellor Hammond is clearly supportive too.

“Sterling, which was fluctuating all morning, has initially weakened on the news, gilt yields have fallen, and the FTSE picked up somewhat. One shouldn’t expect massive benefits from a weak currency these days, but it is important not to have a strong currency, in a competitive and low global growth. The major benefit of currency weakness to the UK will be more likely in attracting capital flows from international investors and a boost to tourism, rather than a huge rebalancing of the economy to manufacturing and exporters.

“It does look as though the developed world is going to move away from so-called austerity, and we can anticipate loose fiscal as well as monetary policies, including, perhaps, long overdue infrastructure programs. We can certainly expect this in the US, whoever wins in November, and it is likely important for a post Brexit UK as well. This will, however, have implications for bond yields, currency, and perhaps inflation.”


Shilen Shah, Bond Strategist at Investec Wealth & Investment, said:

“The BoE has surprised on the upside with a cut in interest rates to 0.25% combined with an expanded £60bn QE programme including both (£50bn) Gilts  and (£10bn) corporate bonds. Additionally, the BoE has initiated a new term funding scheme to help banks/building societies to mitigate the low interest environment. The MPC also indicated further cuts in the base rate are probable over the next few meetings.

“Market have reacted positively to policy action, with the 10-year Gilt hitting a recent low of 0.64% (16bps down on the day), the Sterling/USD rate falling to 1.3174, 1.13% down and the FTSE 100 & 250 both up close to 1% on the day.

“Despite the BoE expecting inflation to increase above its 2% target in 2017, concerns over the UK’s economic health as indicated by the sharp falls in July’s PMI has spooked the central bank into action.”


Ben Brettell, Senior Economist, Hargreaves Lansdown:

“Recent survey data has been so bad that anything other than a rate cut today would have disappointed markets. Expectations had also grown that a package of measures would be announced in addition to a 25bps cut in base rate.

“In the event the Bank went further than markets anticipated, and as a result sterling immediately fell by more than a cent and a half against both the dollar and the euro. The FTSE 100 jumped almost 100 points, or 1.5%.

“Whether these measures are appropriate, only time will tell.

“Survey data shows referendum has caused significant uncertainty, and it seems certain some kind of negative shock is on the way. This is reflected in the downgrade in the Bank’s forecast for growth next year to 0.8%, down from 2.3% in its May forecasts. However, sentiment is more volatile than activity, so it’s possible the magnitude of the shock will be smaller than the survey data implies.

“Even if you accept the economy is going to get sick, I would question whether lower interest rates and more QE are the right medicine.

“The Term Funding Scheme will mean that banks aren’t reliant on savers’ cash, so I expect savings rates will be slashed. Yet savers have already accepted their cash is generating next to nothing – a cut in interest won’t mean they suddenly rush out and spend it instead. Likewise borrowing is already cheap – slightly lower rates will do little to encourage companies to take on more debt. It’s economic uncertainty, not the cost of financing, which is putting businesses off investing at present.

“QE is designed to bring gilt yields down, and to flatten the yield curve. However a look at current gilt yields tells you they are already extraordinarily low – what is the benefit of bringing them down further?

“Mark Carney has rightly pointed out that monetary policy can only do so much. This lays the gauntlet down for the chancellor to apply some fiscal stimulus when it comes to this year’s Autumn Statement. Gilt yields are so low that the government can borrow at next to nothing, which could pave the way for investment in infrastructure projects like an extra runway at Heathrow.”


Anthony Doyle, Investment Director, M&G Retail Fixed Interest team:

“Today’s rate cut by the Bank of England Monetary Policy Committee (MPC) did not come as a surprise to the market, which was pricing in a 100% chance of a rate cut to 0.25%.  The Bank Rate now stands at a historic 322 year low. This move had been well communicated by BoE Governor Mark Carney and other members of the MPC in recent weeks. What came as a surprise was the extent of the stimulus package which could expand the Bank’s balance sheet by 170 billion pounds including £10bn of corporate bond purchases. Soft economic indicators that have been released post referendum suggest a large decline in business activity and consumer confidence. Because of the likely downturn in economic growth in 2017 as indicated by the BoE slashing its growth forecasts from 2.3 to 0.8 percent, the MPC decided to act pre-emptively and has announced a package of measures aimed at supporting the UK economy.

“Today’s stimulus package highlights the shift in the Bank of England’s approach to managing the economy. There is currently no statistical evidence that the labour market is deteriorating or that inflation is a problem. Faced with the economic uncertainty caused by the UK’s decision to leave the EU, the MPC has decided to act early, decisively and in size in order to limit the damage that a contraction in business investment and household consumption could have on the UK economy. Despite today’s actions, it remains to be seen whether this will be enough to lift the spirits of businesses and consumers across the UK given the ongoing uncertainty surrounding the UK’s relationship with the EU.

“Going forward, we expect that the BoE will enter into “wait-and-see” mode to allow today’s actions to be felt throughout the economy. However, Governor Carney has proven himself to be a dovish central banker and should the economic data weaken in the months ahead, it is likely that he will advocate a range of further monetary policy easing measures including another potential interest rate cut.”


Richard Clarke, Head of Investment Management, KPMG UK, comments:

“Another small cut after seven years of record low interest rates is unlikely to have a dramatic impact on the future of UK investment management industry, focus will remain on issues like assessing the impact of Brexit and meeting the changing demands of digital savvy customers.

“However even lower interest rates will reinforce the importance of asset management as the British public find it increasingly difficult to make returns. Asset managers will need to work hard to help  their clients deploy their cash in a way which achieves their targeted returns without creating too much additional risk.”


Alex Brandreth, Deputy CIO at Brown Shipley:

“The shockwaves from the referendum result on the 23rd June are clear for all to see; recent Manufacturing and Service survey data have fallen significantly and the Bank of England have taken the decision to act in support of the economy via both an 0.25% interest rate cut and further quantitative easing.

“It is unclear how further QE will stimulate the economy, interest rates have been at ultra-low levels since March 2009 and yet the UK economic recovery has been weak. Cutting interest rates is designed to make financing more affordable and encourage investors to borrow. The only problem is that we live in a highly indebted society and investors are unlikely to borrow should they have concerns about the future direction of the economy. Which begs the question; is monetary policy broken?”


Benson Hersch, Association of Short Term Lenders (ASLT) CEO:

“Not everyone will welcome this decision, which was widely expected.   The prime beneficiaries will be entities which are highly indebted.  Also, exporters will benefit as the exchange value of the Pound drifts lower and lower.  As per usual, pensioners will be battered, as ever lower interest rates mean reduced incomes.   The housing market is probably not going to be affected – it influenced more by consumer sentiment and general economic conditions.  The expectation of future interest rate rises will be dampened, possibly making people more comfortable with long-term affordability issues but hopefully we won’t, like Japan, land up in a long-term low-growth cycle.”


John Phillips, group operations director at SpicerHaart and Just Mortgages:

“The mix of interest rates being cut and the monetary stimulous package has already sent the market into freefall again and the pound has dropped further as expected, but I expect both to bounce back again.  It is hard to see how this will have an effect on new residential rates as they are already at record lows, but it will see many SVRs and base-rate tracker rates falling for the first time in 7 years.  This will be good news for people getting on the housing ladder however, as there has surely never been a better time to buy with mortgage rates at such incredible lows.”


Jonathan Sealey, Hope Capital CEO:

“It was the right thing to do for the Bank of England to cut rates now to stop the UK from going into recession.  Personally I do not think that we will have a recession, but that we will see instant reactions on the stock market and with the pound, followed by a bounce back in a few weeks’ time.  I do not think that it will have a major effect on residential property; although we may see commercial property values drop further in London, values are likely to continue to stay strong in the rest of the UK.


Willem Verhagen, Senior Economist, Multi Asset, at NN Investment Partners: 

  • “The easing actions taken today are aimed at mitigating this growth slowdown and thus preventing inflation from falling below target once the exchange rate effect runs out of the inflation data. All this seems the right action to take given the fact that the risk to inflation expectations is if anything a bit to the downside.”
  • “For now the BoE has clearly chosen to look through the exchange rate induced rise in inflation because the central bank expects this to be temporary. Meanwhile, the growth slowdown will cause the unemployment rate to rise which taken in isolation will over time start to exert downward pressure on inflation.”
  • “The BoE faces a trade-off between upward pressure on inflation exerted by the Sterling depreciation and downward pressure on growth momentum induced by the post-Brexit fall out. The latter is clearly becoming visible in consumer and business confidence data.”
  • “Much like other central banks the BoE is clearly acutely aware of the potential negative consequences of lower and flatter yield curves on the business model of financial institutions and hence credit supply. For this reason action has been taken which mitigates the negative financial sector profitability consequences of the cut in the Bank rate and the increase in sovereign QE.”
  • “The BoE introduced a Term Funding Scheme which should help lower bank funding costs and act as an insurance against an increase in the price of bank wholesale funding. In doing so, it should help financial institutions in passing on lower rates to their customers. Also the BoE will start to buy corporate bonds (total size GBP 10 bn) which should help to contain credit spreads.”
  • “The 60 bn addition to the sovereign QE program is once again a lump sum package which is probably less effective than the open-ended QE programs implemented by the Fed until 2014 and the ECB currently. These latter programs explicitly tie the continuation of QE to the attainment of the central bank’s objectives.”
  • “We expect more easing in the  next few months where the emphasis will once again be  on mitigating the negative effect for financial sector profits. In this respect one could think of a further rate cut (but less than 25 bps), more private sector asset purchases and possibly a more open ended QE program.”

 


Leila Butt, senior economist at Prudential Portfolio Management Group:

“These measures are unlikely to prevent the economy from slowing sharply, as business investment in particular, will be hard hit by continued uncertainty regarding the UK’s future relations with the European Union.

“As expected, the Bank of England acted pre-emptively to support the economy, which appears set for a sharp slowdown if not an outright recession. With rates already near the zero lower bound, thus rendering this cut less effective than would ordinarily be the case, the other accompanying measures that the BoE unveiled both today and since the referendum, should provide some marginal support to the economy.  In the coming months we expect the BoE to stimulate further to support the economy.”


Ian Spreadbury, portfolio manager of Fidelity MoneyBuilder Income and Fidelity Strategic Bond funds:

“The outlook for the UK economy has deteriorated markedly, but it was always going to take a little time for the enormity of the UK’s situation to sink in. The Bank of England had signalled they were willing to provide support and had been under increasing pressure from the market to cut interest rates and provide additional monetary stimulus. Today’s decision arguably marks the start of Carney’s version of Draghi’s ‘whatever it takes’. The key question facing investors from here is whether it will work, and if not, what other tools the Bank of England has at its disposal.

Will It Work?

“The theory of low rates is either that it gets the currency down and helps the economy, or it encourages people to borrow and helps GDP. The problem with the former, while in the UK it has worked to some degree, globally it’s a zero sum game. Not everyone can get the currency down. Regarding the latter, encouraging people to borrow when global debt to GDP is already at an all-time high is unlikely to gain much traction. If someone is coming up to retirement in the next 5-10 years, with interest rates having come down to such a low level, they are going to need a much bigger capital amount to provide the same income. There is a real concern that as rates come down and down, people just say…”I need to save more” and to some degree low rates could have the opposite effect to that intended.

“The corporate bond buying will account for around 10% of the outstanding eligible market. Crucially they have said the corporate bond purchases will be over 18 months, as opposed to the gilt purchases over 6 months, which is a recognition of the impact this will have on liquidity. While this is not on the same scale as the ECB’s corporate bond buying, we think it will encourage the sterling credit markets to open for business and we should see a pick-up in issuance from today’s subdued levels. The Term Funding Scheme, designed to ensure the banks keep lending, should help to somewhat mitigate the impact on their net interest margins from the interest rate cut.

What else could the Bank of England do?

“The Bank of England clearly delivered more than expected based on their significantly reduced growth outlook and potential for easing on all fronts. While the Bank of England might look like it is running out of room to manoeuvre, the Bank of Japan and European Central Bank have shown this year that anything is possible on the policy front. Will we see negative rates in the UK? It’s unlikely at this stage, but entirely possible in our view. The major question mark hangs over whether negative rates are actually working as a strategy. There is also the potential for more aggressive quantitative easing further down the line, which can of course take many different forms. However, in the event that monetary stimulus fails, a better option to stimulate the economy could be for the Bank of England to embark on a fiscal stimulus package. Though it is a little too early to be talking about helicopter money and the like.

Portfolio Strategy

“Recent events, including today’s decision, have served to reinforce our base case of slow growth, low inflation and high systemic risk. We plan to continue our long-held focus on high conviction credits, with a bias to non-cyclical areas, secured asset-backed bonds, and a good liquidity buffer for ballast in an ever more uncertain and volatile market. We fully expect the Bank of England to remain accommodative and the potential for further interest rate cuts and additional quantitative easing remains a major positive for fixed income sentiment.”


 

 

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