The Bank of England continues to extend its policy actions

Yesterday the Bank of England gave its latest policy statement and announcement. The headline announcements were policy was unchanged with Bank Rate remaining at 0.25%, that the £60 billion of government bond would continue and the £10 billion of Corporate Bond QE would begin on the 27th of this month as previously announced. There was an announcement however about another significant policy change.

As set out in the August Report, the Term Funding Scheme (TFS), which had been introduced as part of the policy package in August, would have an initial drawdown period of 18 months.

There will not be votes on this as of course banks need a certainty not available to anyone else! There is in fact also a clear change in the Monetary Policy Committee making this decision.

The MPC only expected to adjust the terms and length of the Scheme should macroeconomic conditions warrant it,

You see this is a type of replacement/addition to the Funding for (Mortgage) Lending Scheme or FLS  which was always announced in this form.

The Bank and HM Treasury launched the Funding for Lending Scheme (FLS) on 13 July 2012.

There has been a widening of the Bank of England’s remit here with little debate or actual announcement. A sort of financial equivalent of what the military call mission creep. Also the FLS has got forgotten by many but it still rolls on with some £60.6 billion of cheap finance provided to various banks of which some £33.1 billion went to Lloyds Banking Group.

Term Funding Scheme

I think that this is an extremely significant move and as it begins on Monday it is time to dig deeper. Here is the main definition.

The Term Funding Scheme (TFS or the Scheme) is designed to reinforce the transmission of Bank Rate cuts to those interest rates actually faced by households and businesses by providing term funding to banks at rates close to Bank Rate.

So cheap funding for banks which of course will put downwards pressure on bank deposit savings rates and presumably mortgage-rates too. Actually the money may be at Bank Rate.

For TFS Groups whose Net Lending over the Reference Period as a whole is positive, the fee will be 0bp per annum.

They can borrow up to this.

The Borrowing Allowance for each TFS Group will be set at 5% of its Base Stock plus an amount equal to its most recent Net Lending amount.

This is badged as being a boost to the economy although I note that the Financial Times spotted another familiar impact.

UK banks have a new funding scheme, as this week’s Bank of England interest rate cut increases pressure on the profitability of financial institutions.

Okay so how much will it boost bank lending to the economy? From the Inflation Report.

The MPC does not expect the TFS to lead to significantly faster aggregate loan growth.

So in essence it is a plan to boost the profits of the banking sector although I would not be surprised if like the FLS there is an impact on mortgage-rates. However even there we saw from the evidence of Switzerland yesterday that there appears to be something of a base for them even if official interest-rates go negative.

I shall watch this space for Monday.

Corporate Bond QE

There have been stirrings on this front and I would just like to remind readers of my analysis of this subject from the 23rd of August.

In essence this is yet another central banking program which helps larger businesses and in particular ones large enough to issue corporate bonds. Smaller and medium-sized businesses may reasonably feel that they have been left out again. If you think about it there will be an effect to ossify the financial system and the economy as larger companies which do not do well may simply issue corporate bonds and carry on regardless.

The news on this subject has gone down that line as this from the Financial Times indicates. From a reply by northshore.

Amgen, Maersk, Apple, AT&T, BASF, BMW, Bouygues, Cargill, Saint-Gobain, Daimler AG, Deutsche Bahn, Deutsche Telekom, Dong Energy, E.ON, Eastern Power Networks (Cheung Kong), EDF, Electricty North West (Colonial First State & JPMorgan), Engie, Eversholt, General Electric, Hutchison Whampoa, IBM, Linde, London power Networks (Cheung Kong), LVMH, McDonald’s, Mondelez, Nestle, Northern Gas Networks (Cheung Kong), Northern Powergrid (Berkshire Hathaway), Northumbrian Water (Cheung Kong), Paccar, Pepsico, Pfizer, Procter & Gamble, Roche, Scottish Power (Iberdrola), Siemens, South East power Networks (Cheung Kong), Suez, Thames Water (Macquarie), Total, Toyota, UPS, Vattenfall, Veolia, Verizon, Wales & West Utilities (Cheung Kong), Wal-Mart, Wessex Water (YTL Corp), Western Power Distribution (PPL).

We find that along the lines of my analysis big businesses are potentially benefiting here as we mull this supposed aim of the scheme.

firms making a material contribution to the UK economy,

There are a lot of issues here so let me run through them. The first is that as I pointed out above not only does the concept support big business but so does the definition. We now have an idea of how this will play out and smaller businesses may wonder what is going on especially if they have to compete with subsidised  larger businesses.

The Bank of England is already cheerleading for the results.

The inclusion of a Corporate Bond Purchase Scheme in the package had been less anticipated by market participants. Consistent with this, corporate bond spreads had narrowed and sterling issuance by UK-domiciled firms had been strong.

The use of the word domiciled will raise a wry smile from those who have ever looked at the economic situation in Ireland and the chasm between GDP and GNP there.

Also the next bit makes you wonder about the next step planned?

Equity prices had also risen.


There are obvious issues with both these schemes which lead to the danger of what the Cranberries called “Zombie, Zombie,Zombie”. There are a lot of similarities with the mistakes that Japan made where the schemes that were supposed to provide stimulus in fact just channeled cheap cash to big business and led to the “lost decade” concept.

Meanwhile yesterday’s minutes gave us another clue to how Forward Guidance mark 24 is going.

since the August Inflation Report, a number of indicators of near-term economic activity have been somewhat stronger than expected. The Committee now expect less of a slowing in UK GDP growth in the second half of 2016.

So this is good in that the UK economy does not seem to have had a sharp slow down but for the Bank of England there is the issue of it looking like it panicked last month. Is a “sledgehammer” appropriate for a growth slow down?

Overall, these data were consistent with somewhat less of a slowing in near-term UK GDP growth than envisaged in the August Inflation Report.

In essence economic growth of 0.3% is now expected this quarter rather than the 0.1% previously. Yet in spite of the fact that Forward Guidance was wrong again we are promised yet more micro management of the UK economy.

a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of this year. The MPC currently judges this bound to be close to, but a little above, zero.

The same lower bound that Governor Mark Carney had previously told us was 0.5%.

BBC Radio 4

Tomorrow I will be on the Money Box program debating Bank of England policy with Professor Tony Yates who used to work at the Bank of England. The program starts just after Midday and is repeated at 9 pm on Sunday.


23 thoughts on “The Bank of England continues to extend its policy actions

  1. If big businesses (who appear to be mainly foreign owned) are allowed to fund them selves by issuing bonds at a cheaper rate than they can borrow in the market then it is absolutely wrong that they should be encouraged to do so. Having worked at a reasonably senior level in a multinational Corp I can confirm that they already have an unfair advantage over the little guy due to the low borrowing rates they can squeeze out of the banks. They have no problem at all with funding themselves at very low interest rates but hey, if someone offers them even lower – why not take it and enjoy the benefits? This sounds very much like another scheme to prop up the stock market. As for providing ever more cheap funding for banks – it makes me so annoyed I can hardly be rational about it!
    Standing back and looking at the bigger picture, it appears to me that it is another step along the road from which no one has any idea how to return. You have often highlighted this in your blogs but you do wonder why the CB’s keep digging while they are in a very deep hole.

    • Hi Pavlaki

      I can only completely agree. What happens if some of the bonds go wrong? The Bank of England might double up and double up again….

      The danger is we keep bailing out and subsidising companies when at least some should fail.

  2. All this cheap money is helping banks, large corporates, and cheaper mortgages. So banks can be more profitable and pay bigger bonuses, the boards of big companies can have even bigger pay packages and house prices will go even higher.
    If you are a SME looking for funding, a pensioner trying to make ends meet or a first time buyer,
    forget it, these schemes are not for you.
    A complete overaction to a crisis that didn’t happen, that benefits only the chosen few.

  3. In the August Inflation Report they said unemployment would be 5.0 per cent by the LFS measure but gave no new numbers in yesterday’s report. They did say growth would be better than the August projection and inflation would not be so much this year though still up to 2.0 per cent before middle of 2017. I imagine there is still more data to come to hand for this quarter which will result in a revision by them of growth above the 0.3 now projected. Would it be terrible unreasonable to suggest there won’t be a slowdown at all, for Q3 2016.

    • Hi am

      In many ways the Bank of England and Mark Carney end gamed themselves by the views on the UK economy they gave should there be a leave vote in the EU referendum. I thought that up to 3 were thinking of a cut anyway ( certainly Haldane and Vlieghe )and this gave them their chance. It allowed Mark Carney to abandon his Forward Guidance for higher interest-rates (which I was a critic of as I did not believe him)

      With the UK Pound £ falling as it has there was no need for the panicky response in my opinion..

  4. Shaun,
    I notice most new cars adverts on tv are quoting low monthly rates for in essence private leasing deals. In the USA sub prime loan worries have shifted to include autos perhaps all this easy money is turning manufacturers into banks!

  5. Shaun, congrats on your R4 attendance. When I return from riding big waves in the basque country I shall listen again. Beware however UK media is quite partizan and often both naiive and at the same time manipulated and deferential. I’d be keen to hear what you think of Beeb?

    On today’s subject well its another nail in the coffin of true capitalism, once you bought out 1) Banks 2) Mortgage Payers 3) Big business with cheap money the all that is left is “inconsequential scum” or the majority as was proven at a recent referendum.

    Crony capitalism rules, needs to be plastered across the doors of Westminster and the BoE. This could go on for years….The only chink I can see is with the Mortgage payers. Rotten banks and bad corporations wont rock this boat. We shall see with house prices in the south east, since they are an artifice of perception, an animal spirit and subject to human foibles and herd behaviour.

    Here in France the the aged seem to have the upper hand, gurning around the villages in brand new cars at 12mph as they spend their way generous pension on trivia. Little different from daytime UK I guess.


    • Hi Paul

      I hope that you are enjoying yourself over there. As to the UK economy the capitalism of the Bank of England is looking as crony as that of the ECB. I think that Snoopy used to lie on his kennel and say ” When,when,when, will I ever learn?” Something that our central bankers could learn from.

      Cheers for the good wishes.

    • Hi Paul

      I can now reply that the BBC did ask twice for which way I voted in the referendum. To which I replied that I did not do politics and therefore kept any such opinions to myself. Overall I though that they were pretty fair.

    • ‘Crony Capitalism’ always seems to me, to be a phrase designed to let real world capitalism off the hook. What exists on the page regarding ‘pure; capitalism, is just as much at odds with how people ultimately behave, as anything espoused by the far left. Not wanting to get political though, so please feel free to ignore me completely. 🙂

      Congrats on the Radio 4 appearance Shaun!

  6. Hi Shaun Look forward to your money box appearance tomorrow.

    Does anyone know the way,did we hear someone say
    We just haven’t a clue what to do.

    Mark Carney should try a bit of honesty at his next press conference and burst into a rendition of Sweet’s Blockbuster.

  7. missed most of the interview due to wife complaining about the hoover (!)

    had to fix that first

    so at the point you disagreed with the other commentator about the effect of the pound dropping
    I could hear them being flummoxed , including the presenter

    dunno what happened next , I hope you stuck to your guns !


  8. Just listened to you on the Radio.
    Bank of England definitely getting an easy ride on the dual issues of potential over-reaction and more widely whether their whole policy is accomplishing any good after 8 years.
    Keep up the good work.

  9. Hi Shaun
    Well done on the money box.
    I would liken your performance to an
    attacking midfielder who won possession
    and instinctively made a killer pass.


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