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The BOE and its warranted easing move

Undoubtedly the market was pricing some sort of action from the Bank of England (BOE), as the Brexit repercussions on the economy would turn severe if no action plan was in place. The interesting bit, is the fact that markets possibly failed to price in such an immediate aggressive easing.

A rate cut was warranted, with the BOE rate-setting committee cutting interest rates for the first time in nearly seven and a half years, from 0.5 per cent to 0.25 per cent. Other than that the committee also signaled the possibility of a further cut towards the end of the year.

The other surprising measures were the new Term Funding Scheme worth up to £100 billion and the purchase of up to £10 billion in UK corporate bonds The corporate bond-buying program is expected to be limited to firms making a material contribution to the U.K. economy.

In addition, the bond buying program better known as quantitative easing was increased by £60 billion of monthly purchases from£375bn to £435bn.

The immediate announced monetary easing is in line with the BOE biggest quarterly downgrade of growth forecasts, which reduced expectations for 2017 growth from 2.3 per cent to 0.8 per cent, following the huge uncertainty the UK economy will be facing in the coming months. The weakness in sterling ensued following QE and is now down 9 per cent against a basket of currencies since the June vote. This may help exports as well as raising the price of imports for UK consumers.

Post announcement, despite the Governor indicating that negative interest rates should be avoided, the struggle to revive the economy might put further pressure on the BOE to cut interest rates further, even possibly as a detriment towards the banking sector.

In my view, the interesting bit is yet to come. The question I pose is what will be the ECB’s reaction now following the expected remarkable decline in the Sterling versus the Euro. The movement in currency might tamper the ECB’s progress in combating its inflation worries. Despite some economists’ forwarded views of a possible coordination in terms of easing measures, markets are preempting further easing measures by the ECB.

Market reaction was promptly noticed within the fixed income markets, as investors dashed into credit with the prime beneficiaries being US high yield market which rallied by 0.74 per cent as investors continued to fetch attractive yields elsewhere.

In my view, yesterday’s BOE move will impose a short-term market rally, however investors should undoubtedly consider a more long term fundamental and its implications.  

Disclaimer: This article was issued by Jordan Portelli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website. 

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