Today has arrived with an event we have been expecting but the timing was a few days early. Those walking past the Bank of England building in Threadneedle Street early this morning may have got a warning from the opening of Stingray being played on the wi-fi stream.
Stand by for action!
Anything can happen in the next 30 minutes
Before the equity and Gilt markets opened it announced this.
At its special meeting ending on 10 March 2020, the Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25%. …..The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.
So we see that yesterday morning’s equity market falls put the Bank of England into a state of panic. We also see why the UK Pound £ was weak on the foreign exchanges late yesterday as the news seems to have leaked giving some an early wire. The “improvement” announced by Governor Carney of voting the night before should be scrapped. But as we look at the statement the “help to” suggests a lack of conviction and was followed by this.
When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates. In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs). Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.
Okay the first sentence covers a lot of ground. Firstly it implicitly agrees with our theme that banks struggle to reduce interest-rates for ordinary depositors as we approach 0%, we have seen this in places with negative interest-rates. That also means that there is an opportunity to give the banks known under the code phrase “The Precious! The Precious!” at the Bank of England yet another subsidy estimated at the order of £100 billion.
Term Funding Scheme
We have had one of these before as it was initially introduced the last time the Bank of England panicked back in August 2016. It too like its predecessor the Funding for Lending Scheme was badged as being for small and medium-sized businesses but the change of name to the acronym TFSME gives us the clearest clue as to its success. after all successes like Coca-Cola keep the same name whereas leaky nuclear reprocessing plants like Windscale get called Sellafield.
So let me go through the scheme firstly with the Bank of England rhetoric and secondly with what happened last time.
help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses and households benefit from the MPC’s actions;
Mortgage rates fell to record lows providing yet another boost to house prices, building companies and estate agents.
provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets;
Unsecured lending went through the roof going on a surge that has continued as can you think of anything else in the economy growing at 6% per annum? You do not need to take my word for it as the Bank of England cake trolley will not be going near whoever wrote this in the latest Money and Credit report.
The annual growth rate of consumer credit (credit used by consumers to buy goods and services) remained at 6.1% in January. The growth rate has been around this level since May 2019, having fallen steadily from a peak of 10.9% in late 2016.
Let me now give you the numbers for business borrowing. Now the FLS and the first TFS are now flowing anymore but the numbers are in fact better than hat we sometimes saw when they were.
Within this, the growth rate of borrowing from large businesses and SMEs fell to 0.9% and 0.5% respectively.
Oh and in line with the dictum that old soldiers never die they just fade away if you look at the Bank of England balance sheet the Term Funding Scheme still amounts to £107 billion.
We can see this from two perspectives as a rather furious soon to be Governor of the Bank of England Andrew Bailey was given this to announce.
The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019.
Once I had stopped laughing at the ridiculousness of this number I had two main thoughts. Firstly I guess he had to announce something as he had been robbed of rewarding the government with an interest-rate cut later this month. But next remember how we keep being told how we have more secure and indeed “resilient” banks? That seems to have morphed into this.
To support further the ability of banks to supply the credit needed to bridge a potentially challenging period, the Financial Policy Committee (FPC) has reduced the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect. The rate had been 1% and had been due to reach 2% by December 2020.
So yet another disaster for Forward Guidance! It actively misleads…
After all the Forward Guidance from Bank of England Governor Mark Carney about higher interest-rates he is going to leave them lower ( 0.25%) than when he started ( 0.5%). That about sums up his term in office as those like the Financial Times who called him a “rock star” Governor hope we have shirt memories. Also I have had many debates on social media with supporters of the claims that the Bank of England is politically independent. After an interest-rate cut to record lows on UK Budget Day I suspect they will be very quiet today. After all even Yes Prime Minister did not go quite that far! Indeed the Governor confirmed it in his press conference.
“We have coordinated our moves with the Chancellor in the Budget”
Actually there was also a Dr.Who style vibe going on as we had two Governors at one press conference.
More fundamentally there is the issue that interest-rate cuts at these levels may even make things worse. I am afraid our central planners have little nous and imagination and go for grand public gestures rather than real action. After all if you are short on staff because they are quarantined due to the Corona Virus what use is 0.5% off your borrowing costs? The latter of course assumes the banks pass it on.
As to ammunition left well the present Governor has established the lower bound for them at 0.1% ( hoping we will forget he previously claimed it was 0.5% before cutting below it). Will that survive him? It is hard to say because the real issue here is not you or I ot even business it is “The Precious” who they fear cannot take lower rates. That is the real reason for all the Term Funding Schemes and the like. However Monday did bring a curiosity as the Bank of England bought a Gilt with a yield of -0.025% so maybe it is considering plunging below zero.
Meanwhile there was something else curious today and the PR office of the Bank of England in an unusual turn may be grateful to me for pointing it out, But this was the sort of thing that used to make it cut interest-rates.
Gross domestic product (GDP) showed no growth in January 2020……The economy continued to show no growth overall in the latest three months.
No-one but the most credulous ( Professors of economics and those hoping to or previously having worked at the Bank of England) will believe that was the cause but it is a curious turn of events.
Meanwhile let us look at the term of Mark Carney via some music. Remember when he mentioned Jake Bugg? Well he would hope we would think of today’s move as this.
But that’s what happens
When it’s you who’s standing in the path of a lightning bolt
Whereas most will be humming The Smiths.
Panic on the streets of London
Panic on the streets of Birmingham
I wonder to myself
Could life ever be sane again?