Another record low for UK rates: next stop “quantitative easing”

Paul Niven, Head of Asset Allocation at F&C, comments on interest rate cut by the Bank of England: "As widely anticipated the Bank of England has cut interest rates to a record low in a half point move, to 0.5%. While there had been some debate over whether the Bank had already reached the end of the road for conventional policy (in terms of interest rates), and concern over the impact of a cut on bank margins, this move likely signals the end of rate cuts and a shift towards unconventional methods, such as quantitative easing. The roadmap from here, in terms of future policy moves, is uncertain as ‘printing money' has a number of interpretations but, essentially, the Bank will now begin buying assets (government bonds as well as private assets) without recourse to debt funding. This will effectively raise the supply of money.

The Bank has already begun buying commercial paper assets, funded through sales of T Bills but the announcement today that up to £75bn of assets would be purchased through the quantitative easing process was at the high end of consensus expectations. The move by the Bank will be watched with interest over coming months (they stated that it may take up to 3 months to hit the £75bn target) and activity will likely focus initially on the purchase of government assets, in an effort to bring the rate of borrowing down further (the 10yr gilt yield has already dropped by over 25bp on the announcement). It remains to be seen how effective the approach to quantitative easing is, however, as credit markets remain frozen and direct action through asset purchases may be required in an effort to alleviate the situation there.

The Bank is keen to demonstrate that the floor may have been reached in terms of interest rates but there remain other tools at their disposal as they seek to ease financial and monetary conditions."