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.