Strategists have floated the idea of the Bank of England (BoE) buying UK equities directly as a means of helping boost the domestic economy should the package of measures unveiled last week prove inadequate.
The central bank sought to stave off the risk of a post-Brexit recession by cutting interest rates to 0.25 per cent, restarting quantitative easing (QE), announcing plans to buy corporate bonds, and launching a Term Funding Scheme aimed at ensuring banks lend more to customers.
Though the BoE’s Monetary Policy Committee (MPC) voted 9-0 to cut rates, three members voted against the expansion of its conventional QE programme – highlighting a growing feeling that post-crisis monetary stimulus measures may be reaching their effective limits.
Ed Smith, an asset allocation strategist at Rathbones, said equity purchases would make more sense than the BoE’s move into the corporate bond market.
“It would have a better impact on confidence. Sovereign-debt and investment-grade markets have been so distorted that people no longer look at them as a measure of outlook for the economy, while equities still show a future growth outlook. A floor [for equity prices] might instil greater confidence.”
Eric Lonergan, manager of the £822m Episode Growth fund at M&G, agreed equity purchases were an option for the central bank.
“If you want companies to invest more, you want equities to be higher [and reduce their equity cost of capital],” he said. “It could have looked to buy equities and still will. It makes sense because the private economy is unwilling to take risk.”
Buying stocks does have a precedent. The Bank of Japan has bought equities via exchange-traded funds for the past six years as part of efforts to boost its own economy.
Mr Smith rated the probability of such a move by the BoE at just 25 per cent, however, saying it was “fixated” on credit growth and wary of the risk that buying stocks could simply boost asset prices without having a knock-on effect on growth.
Others, like Axa Investment Managers senior economist David Page, said the BoE still had plenty of room to manoeuvre in the gilt market.
“In other economies, buying [equities] emerged because central banks saw constraints in the existing market [in which they were buying].”
Governor Mark Carney repeatedly said last week that negative rates were not to his liking, but Mr Page conceded the BoE would “not take [other methods] off the table”.
For most observers, the question of whether the BoE will need to add more stimulus depends in part on whether the government will shift towards a more expansionary stance on fiscal policy.
Mr Lonergan suggested this could arrive in tandem with further action by the central bank, though he did not specifically make a link between fiscal stimulus and buying stocks.
“The critical issue is what happens with fiscal policy. It may be that we have not heard the last of the BoE. It is possible we get a proper set of policies that may have some role for the BoE. That will be important.”
The BoE’s post-Brexit stimulus package
On August 4, the BoE announced:
• A 25 basis point cut in Bank Rate to 0.25 per cent.
• Purchases of up to £10bn of sterling non-financial investment-grade corporate bonds, issued by firms contributing to the UK economy.
• A £60bn increase in the stock of UK government bond purchases, to £435bn.
• A Term Funding Scheme aimed at ensuring lenders pass on the benefit of the rate cut. It will allow banks to borrow BoE reserves close to the Bank Rate, for four years, equivalent to 5 per cent of the stock of their outstanding lending.
