August 16 – A Big Package

The long awaited cut in base rates has happened. For a long time we all thought “the only way was up”, only to be confounded by the British people finding their voice and giving London centric politicians and Brussels bureaucrats a bloody nose. The result however is beginning to look like an attempt at economic suicide following the analysis now undertaken by the Bank of England and the Monetary Policy Committee.

A sharp slow-down in the economy with rising inflation and unemployment needs to be stopped in its tracks. The expectation that inflation will move above 2% at a time when wages are still not in that territory means real standards of living will go back into decline. So action has been taken before the pointy heads go off on their holidays.

So the simple headline was the base rate cut. The passion poured out however on the range of measures in combination. An extension to the Quantitative Easing programme by adding a further £60bn. A new scheme to purchase up to £10bn of UK Corporate Bonds. A new Term Funding Scheme which will sit alongside the Funding for Lending schemes to ensure these initiatives are passed through to the real economy by Banks. This should be seen as a steroid fuelled FLS. In addition the PRA have announced changes to the leverage ratio scheme for Banks to allow them to apply for dispensations to ensure they are not artificially constrained from lending by the new capital by poorly drafted rules.

The concern around higher costs of capital, poor investment sentiment, weakening sterling and worries on asset values has driven the decisions. The uncertainty about the future was a major driver to act. What is also in the detail is the forward guidance that the MPC expects to have to cut rates again before the end of the year, to a number close to but perhaps still above zero. We can expect that the package may also be applied at higher levels if the economy does not recover sufficiently. Project Fear has spoken with an unprecedented series of combined initiatives and accepting that higher inflation is a price we have to pay to ensure that the economy does not go into decline.

We will have to see what impact this has on the wider economy. However we will see further reductions in interest rates to savers. Gilt rates will stay low and so the pensions that people can buy today will be lower than at any time in history. The mortgage market has already priced in some of this but we can continue to expect to see great rates from lenders for the rest of this year. The intention of these actions is to protect house prices as well as the new build and housing markets. This is all about keeping funding available for mortgages and keeping people in jobs – it must be seen as positive and taking early action to protect people.

Whilst the “money men” have taken action early and quickly, the stage is now set for the government through the Chancellor to then make decisions. The emergency budget that was cancelled will now be the prime economic focus when we get the Autumn statement – although expect this to be pushed as late as possible to give the Chancellor as much time as possible.

Robert Sinclair
AMI August 2016