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Bank of England Slashes Interest Rates Again, to Record Low of 0.1%

The Bank of England cut interest rates for the second time in two weeks, to bolster the economy against the coronavirus epidemic.

The latest cut, announced Thursday, took interest rates from 0.25% to 0.1%—the lowest level in the Bank’s 325-year history.

The bank also increased its quantitative easing stimulus package, buying an additional £200 billion of UK government and corporate bonds to pump cash into the economy and keep down the cost of borrowing.

New governor Andrew Bailey, who took over from Mark Carney just Monday, said the measures were designed to calm markets spooked by the mounting death toll from COVID-19, crises in other economies and rumours that London will soon be forced into complete lockdown.

“The obvious increase in the pace and severity of Covid-19, which has built during the week, was something we had to assess and respond to, we can’t wait for the hard economic data before we act,” he said.

Markets reacted optimistically to the news, with the FTSE ending the day up 1.4% and the pound rising against the dollar.

The cut in interest rates and quantitative easing are “highly unlikely to highly unlikely to prevent a sizeable hit to [UK] GDP this year,” analysts at Japanese investment bank Nomura said. But they added, “there can be no question that the monetary and fiscal authorities are throwing everything they can at this problem to support firms and households, cushion demand as much as is reasonably possible, and to reduce the long-term hit to supply.”

However, there will be questions about what further action the Bank of England can take, after Bailey reiterated his reluctance to use zero or negative interest rates.

Bailey said the Bank was considering further monetary boosts it could make. “We are not done. The Bank of England will do what the public needs in the days and weeks ahead.”

As interest rates plunged, some lenders moved quickly to withdraw tracker mortgages from the market.

Henry Jordan, Mortgage Director at Nationwide, said: “With a second cut in interest rates in just over a week, bringing Bank Rate down to an unprecedented 0.1%, we have taken the decision to temporarily withdraw all of the society’s residential tracker mortgages from sale.”

Other lenders, including Barclays, HSBC and Santander, said they would reduce their tracker and variable rate mortgages in line with the new Base Rate.

Among HSBC’s tracker mortgages is a two-year deal which charges just 0.64% above the Bank of England base rate. Now pegged at 0.74%, the deal is believed to be the lowest interest rate ever offered for new mortgages. It’s available to buyers with a 40% deposit, on properties worth up to £5 million—but buyers will need to act quickly. Brokers expect it too will be withdrawn from the market by next week.

Broker Aaron Strutt of Trinity Financial said the recent cuts had demonstrated the value of tracker mortgages. “About 95% of mortgages are on a fixed-rate basis, but if you’d taken out a tracker a couple of months ago your rate would have effectively halved.”

Source: Money Expert

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UK: Rate cut coming as consumption risks build

Like everywhere else, there is a rising risk that the Covid-19 demand shock will cause a decrease in GDP in the second quarter. We expect the Bank of England to cut interest rates later this month, although the bigger focus for markets should be the forthcoming budget, which arguably offers greater scope to tackle the virus impact.

Coronavirus supply shock risks morphing into demand issue

Since December’s election, the UK economy had been showing some tentative signs of life. Confidence had increased, and there were tentative signs that business activity was rising – albeit perhaps not quite to the same magnitude that some surveys had suggested.

But that’s now likely to change. As we’ve seen in other developed economies, supply chains have been disrupted by issues with sourcing Chinese-made components. Our trade team estimates that around 0.8% of UK output is reliant on value-added from China, although this is unsurprisingly higher for the electronics/electrical equipment industries at around 4%. While the former number may not sound too high, it masks the fact that subsequent parts of the production process may not be able to operate without overseas components. PMIs suggest there are increased delays for manufacturer deliveries.

Like the US, we estimate that roughly 20% of consumer spending is more exposed

The question now facing policymakers is how large the demand shock might be, now that the government is expecting a wider outbreak of the virus in the UK. Incoming Bank of England Governor Andrew Bailey said on Wednesday that “what we need frankly is more evidence than we have at the moment”, explaining perhaps why policymakers opted against joining the Federal Reserve in a coordinated rate cut.

Like the US, we estimate that roughly 20% of consumer spending is more exposed – things like restaurants/cafes (which make up 7%), hotels, transport, among other things. But unlike America, consumer activity has already been fragile for the past couple of years.

Consumer goods/services most exposed to virus impact

Admittedly confidence has recovered a little since the turn of the year, and real wage growth should be stronger this year, buoyed by a combination of lower regulated household energy bills and a tight jobs market.

However, the UK household savings ratio – currently 5.4% – is lower compared to historical standards, and has fallen over recent years, partly following the rise in import costs following the Brexit referendum. That’s quite a bit lower most international peers – the likes of France, Germany and the Netherlands have savings ratios comfortably above 10%.

There has also been a lot of focus in the media about the UK’s lower statutory sick pay levels. Employers are obliged to pay an amount equivalent to a little under 20% of the UK’s average salary if an employee is unwell – or in this case, self-isolating. Policies vary considerably across Europe, but according to an EU report, the rate of income replacement from sickness benefits/rules in the UK is one of the lowest. Sick pay also doesn’t apply for self-employed workers, and in the UK has a slightly higher rate of self-employment than the EU average.

Fiscal and monetary action is coming

This all suggests risks to consumer spending, and we are pencilling in a contraction during the second quarter (although of course, this depends on how far the virus was to spread). To us, this suggests the Bank of England will cut rates by 25 basis points at its next meeting later in March. However, policymakers will be looking closely at the forthcoming budget, where there arguably will be greater scope to limit the economic fallout.

Like other central banks, BoE officials will be acutely aware that there is only so much their own policy announcements can do to solve what is more of a cash flow risk for firms, rather than a debt-serving issue for firms affected by the virus

Following the change in Chancellor, there was a lot of excitement among investors that the Treasury was poised to offer a large amount of fiscal stimulus. It is likely that the government will commit to substantially raise government investment over the coming years, but the Chancellor is much more constrained on day-to-day spending. A fiscal rule, which commits the government to balance current spending in two-to-three years offers very little headroom to lift spending without taxes – particularly given the extra costs associated with managing Covid-19.

The government has already announced it could expand its “Time to Pay” system, which allows struggling firms to pay back tax bills over a longer period of time in smaller instalments. Andrew Bailey also implied there was a joint Bank of England/Treasury programme in the works to give SMEs access to extra finance.

Like other central banks, BoE officials will be acutely aware that there is only so much their own policy announcements – which may also include some other credit easing measures – can do to solve what is more of a cash flow risk for firms, rather than a debt-serving issue for firms affected by the virus.

By James Smith

Source: ThinkIng

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Bank of England policymaker maintains interest rate cut view

Bank of England (BoE) policymaker Michael Saunders has said he is sticking to his view that interest rates should be cut because of weaknesses in the UK’s labour market and wider economy.

“It probably will be appropriate to maintain an expansionary monetary policy stance and possibly to cut rates further, in order to reduce risks of a sustained undershoot of the two per cent inflation target,” Saunders said in a speech on Wednesday morning.

“With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present.”

Saunders was one of two of the BoE’s monetary policy committee’s (MPC) nine members who voted to cut interest rates late last year.

Since then, several other MPC members — including outgoing BoE governor Mark Carney — have suggested a rate cut may be necessary.

Saunders said that while some recent surveys had suggested Britain’s economy had improved, while others had worsened and remained sluggish.

“But, taken as a whole … business surveys are generally soft and consistent with little or no growth in the economy,” he said.

“My own view is that, even if the economy improves slightly from the recent pace, risks for the next year or two are on the side of a more protracted period of sluggish growth than the MPR (Monetary Policy Report) forecast,” Saunders added.

Sterling was 0.2 per cent down against the dollar in morning trading on Wednesday.

By Anna Menin

Source: City AM

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UK job growth slows as Bank of England entertains interest rate cut

The demand for staff from UK employers grew at its slowest rate for almost eight years in October, according to a survey revealed on Friday, appearing to justify two Bank of England rate-setters backing an interest rate cut yesterday.

A monthly index of job vacancies from the Recruitment and Employment Confederation and accountants KPMG fell to 51.7 from 52.6 in September.

It is the index’s lowest level since January 2012 and highlights concerns from the Bank of England that the UK’s labour market may be losing its strength.

It comes a day after two of the Bank of England’s nine interest-rate setters voted to cut interest rates again.

The pair cited signs that the labour marker may be on the turn, despite it being one of the economy’s strong points since the Brexit vote.

The REC report released on Friday showed permanent job placements fell for an eighth consecutive month and at a faster rate than last month.

It comes as official data showed job creation was waning ahead of the previous end of October Brexit deadline.

Vice chairman at KMPG, James Stewart, said the uncertainty around Brexit and the upcoming general election on 12 December had dampened companies’ hiring plans.

“It’s not just businesses that are being cautious, however, and over October we’ve seen job-seekers become increasingly nervous about making a career change,” he said.

By Michael Searles

Source: City AM