The Bank of England duly cut interest rates by 0.25% on Thursday, and added a series of further measures to boost the British economy including a promise to buy £10bn worth of corporate debt. They did this in response to their forecast of weakening economic growth in the coming quarters, though they did go short of forecasting an economic recession. Thursday’s actions once again boosted the stock market and will once again force savers into the dilemma of leaving their money in low yielding savings accounts, or equally low yielding government bonds, or once again risk capital back into the equity market.
Much was made in the press on the impact on sterling by the actions of the Bank today, however the pound remains higher than at the low point post the Brexit vote and roughly in the middle of the trading range it has been in since the initial move. Gilt yields did react, 10-year gilt yield falling to 0.67%.
The British press seems to be crediting Mark Carney with acting decisively to boost the economy by the actions today. One can’t help but continue to think that perhaps if he had kept his council better ahead of the vote, some of Thursday’s measures may not have been required.
The measures introduced by the Bank of England today, do appear to give an economy a marginal boost, but in reality its major impact is to boost the stock markets which is all well and good for those invested in it, but there are many who are not.
Philip Hammond has decided against an emergency budget preferring to wait until the autumn statement before he announces what measures he may introduce to help stimulate the economy. Perhaps Mr Carney and the rest of the Monetary Policy Committee would have been better advised to pause, take stock, and look to see the impact of the vote on real business over the summer months before taking such drastic measures. Instead they have made a knee jerk reaction to the recent economic data post the Brexit vote.
They are going to look really foolish in the coming months if the economic data stabalises, and they are forced to rethink today’s action. A small uptick in growth and inflation, and before they know where they are Mr McCafferty, one member of the MPC who has voted in raising rates from time to time in the past few years, will be once again raising his head above the parapet looking to reverse Thursday’s move.
Who knows whether these new measures will boost the economy in the intended way, what it will do is increase pressure on pension fund trustees and increase further risk taking. Pension fund deficits, such as the one at BHS just became a little bigger after today’s action.