BoE keeps negative interest rate powder dry

5 November 2020

The Bank of England base rate has been kept at a record low 0.1%, despite fears that negative interest rates could be on the horizon.

The Bank’s Monetary Policy Committee (MPC) also voted unanimously for the Bank to expand its quantitative easing programme to boost the economy by a further £150 billion, in addition to its existing programme of £100 billion of UK government bond purchases.

The move takes the total stock of government bond purchases to a total of £875 billion.

The statement comes on the same day that the Chancellor of the Exchequer Rishi Sunak announced that the furlough scheme, meeting 80% of employees pay to a cap of £2,500, would be extended until March.

In a statement, the Bank said that since it’s last meeting there had been signs that consumer spending had softened, while investment intentions have remained weak and if the outlook for inflation weakens, the Committee “stands ready to take whatever additional action is necessary to achieve its remit.”

Reacting to the news, Hinesh Patel, portfolio manager, Quilter Investors, said: “The economic environment and ongoing public health crisis has developed considerably since the MPC last met in September. We are charting a different course to what was expected, and the Bank of England has been forced to change its more optimistic tact considerably.

“Those expecting a grand finale in the form of negative interest rates will be left disappointed as the Bank made it clear that asset purchases are the primary policy tool, and will increase QE again if market functioning worsens. But while there were clearly no fireworks today from the Bank today, they will keep negative rates in their arsenal for the quarters ahead. This is a wise move given that both the economy and Covid-19 remain very much an unanswered question, not to mention the fact that Brexit negotiations looked to have stalled with little chance of getting going again.”

Luke Bartholomew, senior economist, Aberdeen Standard Investments, said given the resurgence of the virus and a return to lockdown, an increase in asset purchases was always very likely.

Bartholomew commented: “As it was, the amount of easing delivered today was at the top end of expectations as the Bank seeks to do all it can to support the economy. However, with the structure of rates already incredibly low, it is hard to believe QE can deliver a huge amount of further stimulus from here, even if does make it easier for the government to finance and deliver it’s huge fiscal easing.”

According to Laith Khalaf, financial analyst, AJ Bell, the Bank is “beginning to run out of dry powder” as it now holds almost half the gilt market and interest rates are close to zero.

Khalaf said: “That means if the central bank wants to boost the economy further, it may resort to even more extraordinary measures than we have today. Negative interest rates are certainly on the table. QE could also shift towards different assets, such as more corporate bonds, high yield bonds and even equities, as has happened in Japan.”

Industry experts agree that much will depend on how the pandemic, social restrictions and the government’s fiscal response play out over the coming weeks, but markets are currently pricing in a 40% chance of an interest rate cut next year.

While looser monetary policy will be broadly good for equities and for growth stocks that have led the market for the last ten years, Khalaf warns it will be bad news for savers, who have endured more than a decade of ultra-low interest rates.

He added: “Huge amounts of cash have been tucked away since the first national lockdown. Savers should make sure that money is working as hard as possible, by shopping around for the best rate and considering fixed term cash products which tend to offer more interest.

“For money that can be put away for ten years or more, investors should think about drip feeding some money into the stock market, though it’s important to always keep a cash buffer for emergencies.”

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