Newton IM: Commentary on Bank of England’s interest rate reduction

Newton IM: Commentary on Bank of England’s interest rate reduction

11 maart 2020

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Paul Brain, Head of Fixed Income, and Emma Mogford, UK Equities Portfolio Manager at Newton Investment Management (part of BNY Mellon Investment Management) comment on the Bank of England’s reduction of the interest rate

Paul Brain manager of the BNY Mellon Global Dynamic Bond Fund and head of fixed income at Newton Investment Management

"We see the Bank of England’s emergency rate cut as part of a co-ordinated fiscal and monetary response due to the spreading economic shock from Covid-19. The economic fallout from restricting travel and staying at home has yet to be fully felt by the UK economy so this cut can be seen as a preventive one. Coming on the same day as the Budget sends a clear message that the authorities are coordinated.  Other central banks are also cutting rates and focusing on ensuring liquidity is increased. Some economies may not have the same flexibility because their political systems are too partisan or bureaucratic. A cut in the cost of money can help but temporary hits to cash flow are the main concern and other measures will be required to keep businesses alive. We would say the moves on the counter-cyclical buffer and term lending for SMEs are more important and more useful than the rate cut. The problem is not so much with the cost of credit as with the flow of credit, and the former two help with that. The Gilt market was already pricing the cut so we would expect little reaction. Once the economic threat has dissipated the longer term influence would be to see yields rise if growth rebounds."

Emma Mogford, UK equities portfolio manager at Newton Investment Management

"The Bank of England was standing ready to act and we believed it wouldn’t hold back to act outside of a scheduled meeting with an emergency rate cut, as it did in during the financial crisis in 2008, if they felt it was necessary.  With interest rates now back at their lowest level the focus will now shift to taxation and public spending to stimulate the economy.  We will see the first of these measures announced later today in the Budget which we expect to focus on two things: immediate measures to support the health services and economy through the coronavirus and on some big infrastructure projects to meet their ‘levelling up’ agenda.  Today’s Budget marks the end of austerity, which is an important turning point. Looking on a five year time horizon we see this as just the beginning of a long term trend of greater fiscal spending by governments around the world. The direct beneficiaries will be in areas such as building materials, infrastructure and house building and the most important broader implication is the question over whether this can create inflation."

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