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U.K. Markets Bounce After BOE Cuts Rates in Emergency Move

The pound fell after the Bank of England lowered interest rates by 50 BPS to combat the economic fallout from the coronavirus.

U.K. Markets Bounce After BOE Cuts Rates in Emergency Move
A worker loads a tray with bundles of British pound banknotes in London, U.K.

(Bloomberg) --

U.K. stocks jumped after the Bank of England lowered interest rates and announced further measures to combat the economic fallout from the coronavirus.

The FTSE 100 Index advanced as much as 2.2%, while short-term government bonds gained and the pound rebounded against the dollar. The BOE’s out-of-schedule decision to cut rates by 50 basis points comes ahead of the U.K. government budget later Wednesday, which is expected to provide extra stimulus for the U.K. economy with a boost in spending.

“Markets are giving an encouraging initial verdict on BOE measures,” said John Wraith, U.K. interest rates strategist at UBS Group AG. “It’s large scale, decisive, precisely targeted at perceived economic pinch points in the looming coronavirus turmoil, and timed just before the budget.”

U.K. Markets Bounce After BOE Cuts Rates in Emergency Move

Coordinated Action

It’s the first time the BOE cut rates in an emergency move since the financial crisis. It also announced a new Term Funding Scheme, which will include special incentives for smaller firms, and it will be financed by the issuance of central bank reserves. Outgoing Governor Mark Carney said the bank will take all necessary further steps to help the U.K.

The BOE’s move comes as governments and central banks step up efforts to prevent the spread of the virus and try to ensure the economic fallout from it is limited. Monthly U.K. gross domestic product data showed a stagnant economy in January, before the virus took hold.

Traders in money markets are expecting the European Central Bank to also cut interest rates when it meets Thursday, despite the fact it already has them well below 0%.

It’s wise for central banks to position “against the virus,” said Olivier de Berranger, chief investment officer at La Financiere de l‘Echiquier. “They won’t be healing us but they help companies, consumers and states to get out of the crisis faster or easier.”

European Central Bank President Christine Lagarde said Europe risks a major economic shock similar to the 2008 financial crisis unless leaders act urgently on the coronavirus, and indicated the the bank will take steps as soon as this week.

Pound Recovers

The pound fell as much as 1.2% against the euro to the weakest level since October, before reversing the move. It also recovered against the dollar, up 0.5% to $1.2971 as of 9:37 a.m. in London.

U.K. Markets Bounce After BOE Cuts Rates in Emergency Move

Two-year U.K. government bond yields fell four basis points to 0.13%, while the curve steepened as 30-year rates rose 10 basis points to 0.67%. Stimulus can boost inflation expectations, which weighs on longer-dated bonds.

Traders were largely expecting the central bank to cut rates before the scheduled March 26 decision as the number of coronavirus cases across Europe increases, though the move before the budget may have caught some by surprise. Money markets are now seeing little priced in terms of extra cuts from the BOE.

“The move is on the more aggressive side of expectations -- hence the initial sell-off in the pound,” said Jane Foley, a senior foreign-currency strategist at Rabobank. “However, the fact that the U.K. authorities appear to be putting together a strong package to cope with the crisis is also reassuring and this could limit downside in the pound.”

Here’s what others said:

Aberdeen Standard Investments

  • “The bazooka’s are loaded, the Bank just fired their first salvo” said Luke Hickmore, investment director at the firm
  • Seems unfeasible that the ECB does not also find ways of supporting the banking system, Hickmore says
  • “Now feels like the BOE is getting it in the ear from banks already on the problems starting to appear in the economy”

Capital Economics

  • “It won’t prevent the economy stagnating or contracting in Q2 and Q3, but it will help to ensure that the economy can bounce back later this year and in 2020 once the virus has peaked,” says Paul Dales, chief U.K. economist

ING

  • “Depending on the size of the fiscal stimulus unveiled today by the chancellor, this has to potential to be the first example of coordinated monetary and fiscal easing in Europe,” says Antoine Bouvet, senior rates strategist

    • “This is a step in the right direction, but we would await similar steps from larger economies for it to trigger any rebound in risk appetite”

--With assistance from Jan-Patrick Barnert, William Shaw, Ksenia Galouchko, Celeste Perri, Anooja Debnath and Sid Verma.

To contact the reporter on this story: John Ainger in Brussels at jainger@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Neil Chatterjee, Michael Hunter

©2020 Bloomberg L.P.