The Bank of England’s move to cut UK interest rates on Thursday was a well-trailed event yet it moved markets in London and had a knock-on effect on Wall Street.
But did markets overreact on the upside? The FTSE 100 index closed up 1.6% at 6,740.
Certainly, the rumour is never as compelling as the fact. And also it is true that the UK’s central bank went further than just monetary easing.
Following the BoE’s meeting in July when the central bank poured some cold water over the fallout to sterling and the UK economy of Britain’s referendum vote to quit the European Union on June 23, traders began to imagine the Bank was taking a cautious approach to avoid panicking markets.
That was certainly true of July. Come August and the Bank was widely tipped to cut rates.
But along with the 25 basis points cut to 0.25% - a fresh historic low for a Bank founded in 1694 – the BoE also included some other measures that went deeper than some expected.
For one thing, the central bank said it would be reinitiating its Quantitative Easing programme. The BoE signalled it would buy £60bn of government debt over six months and £10bn of corporate debt over 18 months. It also introduced measures to force banks to pass on the rate cuts to customers, especially mortgage and other loan borrowers.
The Bank also announced the biggest cut to its growth forecasts since it started making them in 1993. It has reduced its growth prediction for 2017 from the 2.3% it was expecting in May to 0.8%.
“Given how far sterling and UK rates had already fallen, surprising the market was always going to be a tall order, but it looks like the Bank of England has done just that,” said Timothy Graf, head of macro strategy at investor State Street Global Markets EMEA.
“They appear more concerned about the prospect of a deep recession than their inaction last month might have suggested. I am surprised that they decided to implement a number of measures to address the problem at such an early stage, but given the sharp drops we have already seen in the survey data, they likely anticipate more bad news to come,” he added.
It marked the first rate action from the BoE since March 2009. It also kept a former Monetary Policy Committee member’s prediction intact. Danny Blanchflower said in 2009 that he expected rates to remain ultra-low for years. Seven years on, he was right, but maybe even he could not have foreseen that rates would go lower still, almost within sight of Japanese-style negative interest rates.
In fact, from his US base, Blanchflower tweeted after the UK rate cut: “MPC totally right to act swiftly.” The MPC is the BoE’s rate-setting body.
But rather than spook markets into a sell-off in London and New York, the rate cut sent local stocks into their first rally of the session when midsession came and the rate decision was announced.
That may also have been because markets were relieved that, while the Bank was doing more than lower the price of credit, it was actually offering a smaller package than it at first looked.
In total, the BoE has committed on Thursday to spending up to £70bn over 18 months on government and corporate debt buys. That is £70bn it will inject into the British economy.
But looking at March 2009, the last time a rate move, also down, was made it was actually far more. Back then the rate cut was a full 50 basis points to 0.5% from 1%. Also, £75bn was earmarked to be spent buying government and corporate debt over just three months. And a ceiling of £150bn on asset purchases was put into place by the then Finance Minister, Alistair Darling.
What is more, the March 2009 was the culmination of half a dozen rate cuts from 5% to 0.5% since October 2008. So a six-month period of systematic rate cuts to steady the British economy.
The 2008 credit crunch which brought down bank Lehman Brothers, as well as required the state rescue of various British financial institutions including RBS Group (LON:RBS) and Lloyds Banking Group (LON:LLOY), was no greater a threat to Britain when the euro zone bloc risked imploding than now when Britain is threatened with becoming Europe’s outcast.
Some media commentators are already asking whether the BoE measures on Thursday are enough even if most agree it is soon enough.
For both the UK and US economies, recovery has been slow after the 2008 credit crisis.
For all the stimulus measures thrown at the problem economic growth in both the US and Europe has remained stubbornly sluggish.
But while the vigil is on to see what the BoE measures deliver, figures from the Federal Reserve Bank of Atlanta, one of the Fed’s 12 regional banks, may offer some hope for the disillusioned masses.
On Thursday, the regional central bank projected the US economy would expand at an annualised rate of 3.7% in the third quarter. That compares with a 2017 UK projection of 0.8%. A lot of work ahead it would seem.