Bank of England rogers sleeping RBA

Here’s the statement from an emergency, out of cycle meeting at the Bank of England:

The front line of combatting the challenges of Covid-19 comprises the extraordinary efforts of NHS health professionals, carers, and volunteers across the country, as well as the exceptional support by the FCO to UK citizens abroad.

The Bank of England’s role is to help UK businesses and households manage through an economic shock that could prove sharp and large, but should be temporary. The Bank’s three policy committees are today announcing a comprehensive and timely package of measures to help UK businesses and households bridge across the economic disruption that is likely to be associated with Covid-19. These measures will help to keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm.

Following the spread of Covid-19, risky asset and commodity prices have fallen sharply, and government bond yields reached all-time lows, consistent with a marked deterioration in risk appetite and in the outlooks for global and UK growth. Indicators of financial market uncertainty have reached extreme levels.

Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months. Temporary, but significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for short-term credit from households and for working capital from companies. Such issues are likely to be most acute for smaller businesses.  This economic shock will affect both demand and supply in the economy.

MPC reduces Bank Rate and launches new Term Funding Scheme with additional incentives for SMEs

At its special meeting ending on 10 March 2020, the Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25%.  The MPC voted unanimously for the Bank of England to introduce a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves. The MPC voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.

When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates.  In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs). Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.

The TFSME will:

  • help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses and households benefit from the MPC’s actions;
  • provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets;
  • incentivise banks to provide credit to businesses and households to bridge through a period of economic disruption; and
  • provide additional incentives for banks to support lending to SMEs that typically bear the brunt of contractions in the supply of credit during periods of heightened risk aversion and economic downturns.

Bravo. That’s a central bank with a brain. No “glass half-full” bullshit. No it’s all “too uncertain” equivocation. No hand-wringing over a few lousy basis points.

Instead, a righteous assessment of the risks accompanied by the courage to act, to innovate, to print, succeeding in short-circuiting a pound rally and smashing it into downtrend.

The BOE just joined the congaline of global central banks that are rogering the sleeping RBA.

David Llewellyn-Smith
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