The central bank clearly felt that it had nothing to lose by delivering more-than-expected monetary stimulus, according to Nicholas Wall, portfolio manager, Old Mutual Global Strategic Bond Fund, Old Mutual Global Investors.
The Bank of England (BoE) eased monetary policy aggressively today, adopting a broad range of policy measures as it seeks to counter the post-referendum uncertainty faced by businesses and households.
Interest rates were cut by 0.25% to 0.25%; the bank also said it would buy £60bn of government bonds over six months and as much as £10bn of corporate debt in the next 18 months. In addition, the BoE said it would lend as much as £100bn to banks to make sure the stimulus reaches the real economy.
The bank clearly felt that it had nothing to lose by delivering more than expected and weakening sterling further, attempting to raise inflation and nominal GDP. With limited ammunition the central bank clearly felt that it was better to be aggressive and fast in loosening policy, along the lines of their Chief Economist Andrew Haldane’s speech calling for a ‘sledgehammer’ approach. Governor Mark Carney may also have felt his credibility was on the line after his 30 June speech strongly hinted at further easing over the summer.
The Monetary Policy Committee has left the door open to further easing. It didn’t put a floor under interest rates (the majority of members see interest rates near zero by year-end), while an expansion of the bank’s Asset Purchase Facility is likely should the data deteriorate. Further down the line we expect far closer cooperation between the central bank and government – as this current monetary policy framework reaches its limits, we could creep towards expansionary policy funded by money creation. November’s meeting, when the BoE’s next Inflation Report is released, could shape up to be very interesting.