AXA IM: BoE surprise monetary easing - another day, another policy measure

March 20, 2020

The Bank of England (BoE) today announced further monetary policy easing in an unscheduled meeting. The Monetary Policy Committee (MPC) announced a further reduction in Bank Rate by 15bps to 0.10%. It also restated its QE operations, unanimously voting to raise its asset holdings by £200bn to £645bn. Asset purchases would, in the majority, comprise of government bond purchases. The MPC also additionally voted to enlarge the Term Funding scheme for Small and Medium sized Enterprises (TFSME). We had expected the BoE to cut rates to 0.1% and restart QE no later than its scheduled meeting to be announced on 26 March. Nevertheless, we were surprised by the action today and if anything the BoE’s QE scale was a little larger than we had expected. 

In a statement accompanying the action, the MPC stated that Covid-19 and measures being taken to address the virus “will result in an economic shock that could be sharp and large but should be temporary”. It added that measures undertaken by the BoE were designed to help meet the needs of UK businesses and households in dealing “with the associated economic disruption”. This latest move comes after an already active period of monetary and fiscal support:

• 11 March - The BoE and government undertook monetary, macroprudential and fiscal policy action, including a 50bps Bank Rate cut, the introduction of a Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME) and a cut in the counter-cyclical buffer to support lending, as well as a £30bn fiscal support package.
• 17 March – the Chancellor announced a £330bn loan guarantee scheme, and a further £20bn of direct fiscal support. The BoE introduced the Covid-19 Corporate Financing Facility (CPFF) to provide support to the commercial paper market in the UK.

In total, we estimate the BoE and Treasury have enacted policy which amounts to around 4-5% of GDP, excluding measures to facilitate lending. The scale of stimulus is indicative of the scale of economic disruption expected over the coming quarter particularly. The BoE also made specific reference to the liquidity shortage evident in financial markets at present. The BoE’s next scheduled meeting is for 26 March. It will publish minutes of today’s emergency meeting and the scheduled meeting and any subsequent decisions at that time. For now, our expectations are that the MPC has delivered most of the monetary policy stimulus and we do not necessarily expect further easing next week. That said, the MPC will be mindful of problems in financial market liquidity and we would not be surprised to see more technical measures enacted if liquidity scarcity persists over the coming days. Moreover, with risks to the economic outlook continuing to lie to the downside, we expect further monetary policy stimulus – primarily through additional QE – over the coming months. Meanwhile, pressure continues to mount on the UK government to provide additional financial relief to small business and households and we do expect additional direct fiscal support in this area over the coming weeks.

Government bond yields reacted predictably with 2-year gilt yields -12bps to 0.21% and 10-year yields -8bps to 0.82%. Sterling, however, initially gained to both the US dollar and the euro, before paring gains to the dollar to remain flat, but remaining 0.9% firmer against the euro. Sterling remains around the lows of the financial crisis against the euro (2009) but is still close to 35-year lows to the US dollar.