BOE Cuts Rates to 0.1%, Restarts QE in Latest Virus Response
U.K.’s central bank lower rates by 15 basis points and boost its quantitative easing target to 645 billion pounds.
(Bloomberg) --
The Bank of England cut interest rates to a record-low 0.1% and added 200 billion pounds ($230 billion) to its asset-purchase program in its latest emergency action to mitigate the economic impact of the coronavirus pandemic.
The decision, just days into the tenure of new Governor Andrew Bailey, saw the central bank lower rates by 15 basis points and boost its quantitative easing target to 645 billion pounds. That increase will mainly be made up of extra gilt purchases, but will also include corporate buying, and will be completed as soon as operationally possible.
In a conference call with reporters following the decision, Bailey said it was right to act now, rather than waiting for data to show the impact of the virus. He said the BOE’s actions reflected the unprecedented nature of the crisis, the pace of which was increasing very rapidly. The central bank still has more in the tank, he said.
The pound extended gains after the announcement, rising as much as 1.6%, before paring the advance to trade 0.4% higher. At one stage on Wednesday, the currency tumbled as much as 5%, dropping to the lowest since 1985.
Bailey said that market moves had bordered on the disorderly in recent days and market pricing had been exacerbated by rumors of a London lockdown. Still, the BOE isn’t in favor of closing markets, he said.
Meanwhile gilts rallied, with two year yields dropping 15 basis points to 0.20%.
The BOE also announced it was increasing the size of its Term Funding Scheme targeted at smaller businesses.
What Our Economists Say:
“The move will do little to prevent the economy suffering significantly in 2Q, but it will give it a better chance of rebounding later in the year.”
-- Dan Hanson
The central bank has previously indicated that 0.1% is its effective lower bound for rates. While Bailey said Thursday that he’s not in favor of negative rates and has indicated previously that the BOE wants to avoid having to cut rates below zero to protect the banking system, he also said he would never rule anything out.
“The spread of Covid-19 and the measures being taken to contain the virus will result in an economic shock that could be sharp and large, but temporary,” the BOE said in the statement. “The role of the Bank of England is to help to meet the needs of U.K. businesses and households in dealing with the associated economic disruption.”
The Monetary Policy Committee voted unanimously in favor of the latest surprise move. The BOE said it would start bond buying on March 20, when it intends to purchases 5.1 billion pounds of gilts. Buying will be at a “materially” faster pace than in the past, and the levels of purchases will vary based on market conditions, it said.
It’s the latest in a string of emergency action from the BOE and its counterparts around the world, after Sunday night saw the bank unite with five global counterparts, including the U.S. Federal Reserve, to ensure dollars are available around the world via swap lines. The Fed also cut rates to near zero and restarted its on QE program.
The European Central Bank launched an 750 billion euro ($820 billion) pandemic emergency debt-buying program Wednesday. That came on top of 120 billion euros in additional asset purchases agreed last week alongside measures to pump more liquidity into the financial system and to subsidize long-term loans for banks.
Officials around the world are scrambling to respond to the spread of the coranavirus, which is forcing countries to shutter business and restrict travel. The problem for central banks is that they have already used much of the already-limited monetary-policy arsenal to fight the financial crisis, and have thus far failed to assuage concern among investors.
The BOE’s latest action builds on a suite of measures from policy makers last week -- including a half point rate-cut to 0.25% from 0.75% and a new program to provide easy and cheap credit -- that came on a day of coordinated action with the U.K. Treasury.
The government announced Tuesday that the BOE would provide funding to businesses by purchasing commercial paper in an unlimited program which they aim to have operational by next week, a move Bailey said increases the BOE’s policy space.
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