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Bailey: Bank of England will reverse QE before raising rates

Bank of England governor Andrew Bailey believes the Bank of England must begin reversing quantitative easing before hiking interest rates from record lows.

Bailey said today that a reveral of QE should come before lifting rates from their historic lows of 0.1 per cent, signalling an upending of long-standing Bank of England policy.

Bailey said the time for such action was not now, but that the high level of central bank asset purchases “shouldn’t always be taken for granted”.

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“When the time comes to withdraw monetary stimulus, in my opinion it may be better to consider adjusting the level of reserves first without waiting to raise interest rates on a sustained basis,” Bailey wrote in an article for Bloomberg.

Last week the Bank of England announced a further £100bn of stimulus to take its bond-buying target from £645bn to £745bn for 2020. However, it said the rate of QE would decrease for the rest of the year.

The Bank’s monetary policy committee slashed interest rates to 0.1 per cent back in March to combat coronavirus.

Bailey’s comments today signal a shift away from his predecessor Mark Carney’s strategy.

Carney had said the Bank would raise rates before trying to sell bonds back to the market.

But Bailey said today he did not want high Bank of England purchases of government bonds to become a long-standing scenario.

“Elevated balance sheets could limit the room for manoeuvre in future emergencies,” he said.

The Bank of England has purchased huge amounts of government bonds since the start of the coronavirus crisis.

By Joe Curtis

Source: City AM

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Bank of England ‘not contemplating’ negative interest rates, says governor Andrew Bailey

Bank of England governor Andrew Bailey has said Threadneedle Street is not considering cutting interest rates to below zero.

The governor said that it would be unwise to rule anything out, “particularly in these circumstances,” in an online question and answer session with the Financial Times.

Yet he said: “It is not something we are currently planning for or contemplating.”

His comments come after deputy governor Ben Broadbent said the Bank was open-minded about its next steps. He said of negative interest rates: “These are the balanced questions the committee has to think about.”

Although once unimaginable, negative interest rates have been put in place in various central banks around the world over the last decade. The European Central Bank (ECB), for example, charges banks to hold money with it in an effort to force them to lend.

Negative rates come with pros and cons. They help spur lending by penalising banks for sitting on money. But they also limit the profits banks can make through lending and the interest on savers’ deposits.

The Bank of England slashed its main interest rate to 0.1 per cent, its lowest ever level, in March.

Bailey said that one of the main obstacles to cutting interest rates into negative territory would be the optics of the complex move.

“I think from a communications point of view, and therefore from a reaction and expectations point of view, it is a very big step.”

He said it must be realised that negative interest rates cause banks problems. The Eurozone’s biggest banks have long complained that the policy hurts their profits.

Should the Bank decide to unleash more stimulus, most analysts think it will ramp up its £645 billion quantitative easing (QE) programme. Under QE, the Bank creates digital money and uses it to buy bonds – mainly government Gilts – in the secondary market.

The BoE stopped short of launching more bond-buying at its last meeting but could do so in June.

By Harry Robertson

Source: City AM

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Bank of England rate preview: markets braced for GDP forecasts

Andrew Bailey hosts his second BoE meeting, but the volatility could come from forecasts rather than any shift in their monetary policy framework.

When and where?

With the Covid-19 crisis keeping everyone locked up, the forthcoming Bank of England (BoE) monetary policy meeting will be virtual, taking place on Thursday 7 April 2020. Most notably, this announcement will take place at 7am local time, rather than the usual midday timing.

Will we see any change to monetary policy?

The coronavirus crisis has seen central banks across the globe push the boat out in a bid to minimise the fallout from global lockdowns that have affected businesses and individuals alike.

In the UK, Governor of the BoE Andrew Bailey didn’t mess about, slashing interest rates to 0.10% and expanding the quantitative easing (QE) program by £200 billion in his first week as the governor. That QE programme stands at £645 billion, and remains a tool which could be expanded when it is deemed necessaryto support the governments push to mitigate the virus fallout. Some have speculated that the timing of this meeting (pre-market open) could highlight a potential market moving announcement such as further QE in the offing. On the interest rate side of things, there is arguably little left to benefit from implementing lower rates, with the restrictions on movement and businesses inhibiting the ability to borrow and invest.

With that in mind, markets are currently pricing in a 99% chance that the committee will keep rates steady at the forthcoming meeting.

What should we look out for?

Perhaps the most interesting part of the meeting comes in the form of the forward looking guidance on where inflation and particularly growth could be in the quarters ahead.

With UK prime minister Boris Johnson showing few signs of reopening the economy in the coming weeks, the global growth picture for second quarter (Q2) is dour. For markets, this expectation of huge economic contraction could see the pound hit hard, with some looking for a figure in the -35% region for the quarter. From an inflation perspective, we are seeing global disinflation take hold, and that is likely to be reflected in forecasts. Remember that low inflation also means looser monetary policy for the foreseeable future irrespective of the coronavirus response needs.

Aside from the growth and inflation forecasts, markets will also be on the lookout for guidance on how the BoE sees the recovery playing out. Thinking back to the Federal Reserve (Fed) and European Central Bank (ECB) meetings from last week, there has been a clear focus on avoiding expectations of a sharp v-shaped recovery for growth, with the road back to health likely to be drawn out given the speculation that it could take over a year to create a vaccine or cure for this virus.

Where now for the pound?

The pound has been on the rise since its mid-March low, with the pair ultimately reaching resistance at the 200-day simple moving average (SMA) level. That has proven a key roadblock to further gains, with the second attempt to break higher once again faltering at that indicator.

This could be a bearish signal coming into play, with the rally seen over almost two-months looking like a potential retracement and precursor to further downside. Much of that sentiment will be driven by wider market movements, with GBP/USD looking remarkably like the FTSE 100 given the inverse correlation between the dollar and global stocks. Nevertheless, there is a chance we could see the pound suffer if forecasts signal potentially a huge decline in Q2 gross domestic profit (GDP).

With that in mind, we could ultimately top out at the 200-day SMA, with a breakdown below 1.2247 providing a bearish reversal signal. As such, the wider outlook will be determined by the ability to break either 1.2247 or 1.2648.

By Joshua Mahony

Source: IG

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Bank of England brings forward release time of May 7 rate decision

The Bank of England said on Friday it will release the result of its next Monetary Policy Committee meeting at 7 a.m. (0600 GMT) on May 7, rather than at the usual release time of 12 p.m.

“This is to accommodate the joint publication with the interim Financial Stability Report,” the BoE said.

As well as the MPC’s decisions on interest rates and bond-buying and its new economic forecasts in a quarterly Monetary Policy Report, the BoE has brought forward a meeting of its Financial Policy Committee to assess the impact of the coronavirus pandemic on the finance industry.

BoE Governor Andrew Bailey will brief reporters after the decision, and the contents of the briefing will be made public at 0900 GMT.

The BoE cut rates twice in March to a new low of 0.1% and ramped up its government bond-buying by a record 200 billion pounds. It is expected to hold off on fresh monetary policy action next week, according to a Reuters poll of economists.

Reporting by David Milliken; Editing by William Schomberg

Source: UK Reuters

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Coronavirus: Bank of England holds rates but paints gloomy economic picture

The Bank of England has kept interest rates on hold at the record low level of 0.1 per cent but signalled it is prepared to take further action to tackle the effects of coronavirus.

The Bank’s monetary policy committee (MPC) today said it “stands ready to respond further as necessary to guard against an unwarranted tightening in financial conditions, and support the economy”.

Threadneedle Street also gave a gloomy assessment of the economy. The MPC said: “The economic consequences of [coronavirus] are becoming more apparent and a very sharp reduction in activity is likely.”

The Bank slashed interest rates to 0.1 per cent at two emergency meetings over the last two weeks. That is the lowest interest rates have ever been in the Bank’s 325-year history.

The rate cuts were designed to pump liquidity into the economy during the coronavirus outbreak. It is also meant to shore up lending and balance sheets.

The BoE has also ramped up its bond-buying, pledging to purchase £200bn more debt. It said today it will continue with this quantitative easing. The Bank added: “If needed, the MPC can expand asset purchases further.”

On top of this, the Bank has cut so-called capital buffers for banks, giving them more cash to lend. It will also buy companies’ short-term debt.

The Bank of England today decided to maintain current policy for the time being. But it said it is prepared to take further action if needed.

The MPC added that it is looking at “the pass-through to banks and building societies’ lending rates of the recent reductions in bank rate”.

Ensuring the extra liquidity reaches the right firms has been a concern of the Bank. It yesterday sent a letter to banks, along with the government and the City watchdog, telling them to keep lending to businesses to ensure that previously viable companies do not fail due to the crisis.

Risk of ‘longer-term damage to the economy’

The Bank of England today gave a stark assessment of the outlook for the UK economy. However, it warned predictions were currently deeply uncertain.

“There is a risk of longer-term damage to the economy, especially if there are business failures on a large scale or significant increases in unemployment,” the MPC said.

“There is little evidence as yet to assess the precise magnitude of the economic shock from Covid-19. It is probable that global GDP will fall sharply during the first half of this year. Unemployment is likely to rise rapidly across a range of economies, as suggested by early indicators.”

Paul Dales, chief UK economist at consultancy Capital Economics, said: “After unleashing unprecedented support in two emergency meetings over the past two weeks, the Bank of England took a break today.”

However, he said that if stress starts to show in the UK’s bond markets, “expect the Bank to do more by providing more liquidity and/or increasing its asset purchases”.

He suggested the BoE might follow the US Federal Reserve and “announce open-ended asset purchases”.

By Harry Robertson

Source: City AM

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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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Bank of England could lower rates further to shield against coronavirus hit

The Bank of England is expected to further cut interest rates and restart quantitative easing to ease the impact of coronavirus on the economy, as former Financial Conduct Authority (FCA) chief Andrew Bailey replaces Mark Carney as governor.

Bailey starts his new job today and is now tasked with steadying the economy against a shock from the outbreak.

One of his first moves could be to cut interest rates as low as 0.1 per cent in the coming weeks, economic experts have predicted.

The Bank of England last week cut interest rates to 0.25 per cent from 0.75 per cent.

And further measures aimed to shore up banks and the economy were yesterday announced by the Bank of England, in a coordinated move with the Canadian, European, US, Japanese and Swiss central banks.

Monetary policymakers have essentially cut the cost and increased the volume of loans it can provide to banks in US dollars, as the US Federal Reserve cut US interest rates over the weekend.

Paul Dales, chief UK economist at Capital Economics, said: “The coordinated action to boost liquidity for banks announced late last night by the Bank of England is designed to prevent the current coronavirus health and economic crisis from spiralling into a full blown financial crisis.

“The idea is that this will nip in the bud last week’s signs that banks are becoming less willing to lend to each other in money markets, which is what caused major problems during the financial crisis.

“We know that a big economic hit is coming, but can only speculate about its size and duration. For what it’s worth, we think a short-term hit to GDP of around 2.5 per cent is possible. While we think (hope) that a financial crisis, which would deepen and lengthen that hit, will be avoided, we do think the Bank of England will have to do more by cutting interest rates by a further 15bps to 0.10 per cent and restarting quantitative easing.”

Samuel Tombs, chief UK economist at Panetheon Macroeconmics, agreed the Bank of England is likely to announce new stimulus measures.

He said: “The Monetary Policy Committee (MPC) might be worried that if they overcook stimulus now and add to the downward pressure on sterling, they will only make life more difficult next year.

“But no one can be confident at this stage that the temporary shock from the coronavirus will not evolve into a self-perpetuating downward spiral in demand, reinforced by falling asset prices and tightening credit conditions.

“The near-term bout of low inflation also might have lingering counterproductive effects on inflation expectations and wage growth, if confidence is not shored up soon.

“So despite the medium-term outlook for inflation, we expect the MPC to cut Bank Rate to its effective floor of 0.10 per cent, from 0.25 per cent, at its scheduled meeting on March 26, and then to restart its QE programme at its meeting on May 7.”

Written by: Lana Clements

Source: Your Money

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Bank of England Slashes Interest Rates to Bolster Economy During Pandemic

The Bank of England has announced an emergency cut to interest rates in an effort to limit the economic impact of the coronavirus pandemic.

In its first emergency meeting since the 2008 financial crisis, the monetary policy committee voted unanimously on Tuesday to slash the base rate from 0.75% to 0.25%.

The Bank said the cut was in response to the “economic shock” of the COVID-19 outbreak and would “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.”

Mark Carney, outgoing governor of the Bank, said the economic damage of the virus wasn’t clear yet but suggested the UK economy could shrink in the coming months. Policymakers had already witnessed a “sharp fall in trading conditions,” including in spending on non-essential goods, he said. Other nations are experiencing similar slowdowns and the Chinese economy, the world’s second-largest, is forecast to contract in the first quarter.

However, he said the downturn wouldn’t be as severe as the recession which strangled the UK economy in 2008-09. “There is no reason for it to be as bad as 2008 if we act as we have, and if there is that targeted support.”

The cut was announced on Wednesday, in tandem with Chancellor Rishi Sunak’s budget, which included billions of pounds of measures to support the economy during an extended outbreak of the virus.

The steps were coordinated to have “maximum impact,” Carney said.

The cut takes interest rates back to their lowest level in the Bank’s 325-year-history. Rates were previously cut to 0.25% in August 2016 and subsequently raised in increments in November 2017 and August 2018.

The cut will reduce savers’ yields but benefit some homeowners and those looking to remortgage or purchase a new property. The approximately 10% of homeowners with tracker mortgages will see their monthly repayments fall quickly. Lenders are also expected to respond to their lower borrowing costs—and to tumbling swap rates—by slashing mortgage rates.

When the base rate was last 0.25%, some banks offered two-year fixed-rate mortgages for less than 1%, although borrowers needed a large deposit to qualify. Currently, the best two-year fixes are from NatWest (1.19%) and Barclays (1.21%) but better offers will surely follow.

Mark Harris, chief executive of the mortgage broker SPF Private Clients, said: “This is a bold and decisive move from the Bank of England. Swap rates have tumbled in recent days and both the reduction in base rate, plus lower swap rates, will lead to even cheaper mortgage products.”

Consumers can expect already melting savings rates to fall even further and the best deals to be withdrawn from the market. Customers using savings accounts at high-street banks are already reaping historically low interest rates—usually of below 0.5%—leaving banks with little room to trim them further. But while rates on mainstream accounts are unlikely to dip into the negatives, as they have on some accounts in Denmark and Switzerland, they could flatline at 0%.

Source: Money Expert

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Higher interest rates expected under new chancellor

Advisers should expect higher inflation and interest rates as a result of Rishi Sanuk’s appointment as chancellor.

Mr Sanuk was appointed to the lead role in the Treasury yesterday (February 13) after Sajid Javid threw in the towel in a show of defiance against the prime minister’s demands.

It was reported that Boris Johnson had asked the chancellor to fire his advisers in a bid to achieve a closer alignment with Number 10.

As a result industry participants believe the new chancellor will work more closely with Number 10, leading to more government spending, higher inflation and higher rates.

Mohammed Kazmi, portfolio manager for UBP’s Fixed Income team, said: “The market reaction of gilts selling off, a steeper rates curve and a stronger sterling clearly indicate that expectations are increasing for fiscal stimulus announcements to be made at the March Budget.

“The incentive for such spending comes from the results of the general election itself, which saw the Conservatives win in some traditional Labour Party strongholds, who most likely voted Conservative due to their Brexit pledge, however would probably require fiscal spending to be persuaded to vote for the party again.”

Since the news of the new chancellor became public sterling has risen to its highest level against the euro for three months, having gained 1.1 per cent ,and gained 0.7 per cent gain against the dollar.

Josh Mahony, market strategist at IG Group, said the rise in sterling since the announcement of the appointment of Mr Sanuk was the result of the market expecting a higher level of government spending than under his predecessor, which would lead to higher inflation.

As the Bank of England’s job is to target inflation at or near 2 per cent, if higher government spending leads to higher inflation, it is likely the central bank would have to put rates up.

The higher level of government spending may also lead to a higher rate of economic growth, which would boost demand in the economy, and also contribute to higher inflation.

Meanwhile investors sold off UK government bonds, leading to gilt yields rising from 0.61 per cent to 0.65 per cent on the 10-year bond.

David Zahn, head of European Fixed Income at Franklin Templeton, said government bonds have sold off because the market anticipates that inflation will rise, and this will make the income from bonds less attractive.

But Anthony Rayner, multi-asset fund manager at Premier Miton, said the general lack of inflation and growth in the world economy over the past decade means central banks are now more focused on maintaining economic growth and so won’t rush to put interest rates up, even if inflation does rise.

At the most recent meeting of the Bank of England’s monetary policy committee (MPC), the group that sets interest rates, the decision was made to leave rates at 0.75 per cent, as inflation was 1.3 per cent, considerably below the bank’s 2 per cent target.

The level of economic growth was also viewed as being likely to rise in the coming months, as other countries around the world have already cut interest rates, and this would boost the level of growth in the UK, so a rate cut is not needed.

By David Thorpe

Source: FT Adviser

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Interest rates: what a base interest rate cut would mean for mortgage borrowers

Thinking of taking out a mortgage or remortgaging in 2020? With interest rates remaining at record-level lows, what would a potential further interest rate cut spell for homeowners, apart from the promise of ever-lower fixed-rate mortgage deals?

While an interest rate cut is by no means a guarantee, there is a growing assumption that the base rate will be cut further from the current 0.75 per cent on the 31 January. Does that mean that mortgage interest rates will follow suit and fall even more? Yes; however, there’s more to the consequences of this decision that simply lower mortgage rates.

The current low mortgage interest rates are not just down to the low base rate; or rather the low base rate has set off a chain reaction in which lenders are under pressure to offer ever-lower mortgage rates in a bid to secure a dwindling pool of eligible mortgage applicants.

Current mortgage approval rates lag well behind pre-2008 levels, with fewer first-time buyers coming onto the market every year. The fact is that the current crop of potential first-time homeowners simply doesn’t have the large deposits required for the hugely expensive UK properties (the price of property still sits at over seven times the average UK salary). Add to that unusual income patterns, with a growing number of people in self employment, and it is easy to see that the traditional ideal mortgage applicant lenders have favoured are becoming an increasing rarity.

The fact remains that mortgage lenders cannot afford to lose the custom of those people who can afford a mortgage, but some will find themselves in a situation where they struggle to compete for those applicants. A base rate cut will mean that the UK’s top lenders (the big banks) will either slash interest rates on their top mortgage products, or introduce new mortgage packages with attractive perks, such as cashback, or a combination of both. The reason they can do this is because they have the profit margins to accommodate making concessions to the base rate cut.

This won’t be feasible for small to medium-sized lenders, however, who simply can’t survive on rock-bottom-rate mortgage products. The only avenue for those lenders to keep a sustainable profit margin is by loosening at least some of their lending criteria, or developing more specialist products catering to people with specific circumstances, e.g. self employment, retirement, or buy to let. Those three areas in particular are likely to see an increase of tailored products with better LTVs (loan-to-interest ratios), or more options for repayment strategies on interest-only mortgages.

This is not to say that we will see anything like the loose approach to mortgage lending criteria seen prior to the financial crisis of 2008; the 100 per cent mortgage, for one, is unlikely to make a return. Apart from everything else, all changes will still need to comply with FCA (Financial Conduct Authority) lending regulations. What we are are likely to see in 2020, however, is lenders looking for ways to attract mortgage applicants who are solid, but whose financial profile would previously have categorised their application as non-straightforward.

BY ANNA COTTRELL

Source: Real Homes