The Bank of England’s (BoE) decision to ease capital buffers for banks has been pinpointed as a sign it is prepared to echo the European Central Bank (ECB) and do “whatever it takes” to ensure stability in the aftermath of the Brexit vote.
In a bid to stimulate lending and stave off a decline in business activity, BoE last week told major UK banks to stop building the countercyclical buffers it had previously demanded they introduce.
The efficacy of the move has been questioned, but BoE governor Mark Carney said it would increase lending capacity by “up to £150bn”.
Standard Life Investments’ Jonathan Gibbs, who co-manages the £1bn Absolute Return Global Bond Strategies Trust, as well as the £240m Ignis Absolute Return Government Bond fund, said the move, announced by the BoE last week, hinted at the limitations of monetary policy but also emphasised the other tools at its disposal.
“Macroprudential easing is a clear sign that everything is on the table. The BoE did not say ‘whatever it takes’, but it was implied,” Mr Gibbs said.
“Doing this also gives us a signal there are limits to interest rates and quantitative easing (QE).”
Markets are currently pricing in almost an 80 per cent chance of a rate cut by the BoE this week, with more QE also predicted in some quarters. However, the effectiveness of such asset-purchase programmes has come into question since their introduction in the aftermath of the financial crisis.
The BoE’s Inflation Report, published earlier this month, was also cautious about the impact of moving rates below 0.5 per cent, the level at which they have sat for the past seven years.
“As we have seen elsewhere, interest rates are too low [or negative]. The hit to bank profitability could perversely reduce credit availability or even increase its overall price,” the report said.
Bank of America Merrill Lynch UK economist Robert Wood said he had revised his rate cut forecast as a result of comments made by Mr Carney at the Inflation Report press conference.
“[The June 30 speech] suggested a greater reticence to take rates to zero than we had expected. So we adjust our call: we now expect the BoE to cut rates to 10 basis points...our central case remains that it does that at its July 14 meeting.”
Mr Gibbs said: “Mr Carney is philosophically opposed to negative rates. But then the Bank of Japan was similarly reluctant prior to moving into negative territory.”
Other takes on the BoE’s strategy have raised the prospect of it buying corporate bonds, akin to the programme launched last month by the ECB. Mitul Patel, head of interest rates at Henderson, said corporate bond buying was a possibility.
“The Funding for Lending Scheme [a bank funding scheme launched in 2012] may also be reactivated, as a way to get money to where it is needed most, in the small and medium enterprise sector,” Mr Patel said.
Policy will also be under scrutiny in another G5 economy this week following the elections in Japan’s upper house on Sunday July 10. Backing for prime minister Shinzo Abe could mean a forceful fiscal stimulus programme by the end of the year, Société Générale analysts said.
However, Mr Gibbs thought monetary policy would continue to be the focal point for Japan. He suggested the country might be on the verge of taking a radical step as it attempted to fight off deflationary forces.
“Our funds are long short-end Japanese duration,” he said.
“Japan has to do something quite soon. It is running out of bonds to buy, and is getting closer to a scenario of direct financing of debt.”
KEY NUMBERS
87
Number of months for which UK interest rates have been on hold
80%
Probability of a rate cut this week, according to markets
