Thursday 18 June 2020 1:06 pm

City reacts to Bank of England's £100bn stimulus

The Bank of England (BoE) this morning held interest rates at a record low and said it will expand its bond-buying programme by £100bn to help to steer the British economy through the coronavirus crisis.

Economists had almost unanimously predicted that the Bank would keep the main interest rate steady and focus on expanding quantitative easing (QE) to shore up the British economy and stabilise financial markets. 

Read more: Bank of England holds rates, boosts stimulus by £100bn

Most businesses were expecting the meeting to pan out as it did, but hailed the decision not to take interest rates into the negative.

The BoE has said that it “stands ready” to do more to prop up the economy if necessary, which many said they thought was likely given the depth of the crisis.

Most said that they expected to see an extension of the QE regime above £745bn at some point later in the year.

Read more: FTSE 100 inches higher in anticipation of additional BoE stimulus

Suren Thiru, head of economics of the British Chambers of Commerce:

“With economic conditions likely to remain challenging in the near term, further easing remains likely. 

“However, with interest rates already at an historical low, extra loosening of monetary policy is unlikely to provide a significant boost to the economy. 

“The central bank has rightly decided against moving interest rates into the negative, which risks doing more harm than good.  

“The focus instead should be on delivering a fiscal environment that limits economic scarring and helps kickstart a recovery. 

“This should include taking steps to close the remaining gaps in government support, including giving businesses with direct incentives to invest and hire, and stimulating consumer demand through a temporary, but significant cut in VAT.” 

Samuel Tombs, chief UK economist, Pantheon Macroeconomics:

“We doubt that this is the last QE extension. Unemployment looks set to rise sharply in the second half of this year and to fall back slowly thereafter. 

“The resulting prolonged weakness in domestically-generated inflation likely will necessitate the MPC doing more to stimulate the economy in the winter. 

“We look for a further QE extension of £50bn in November, but for the Committee to hold back from cutting Bank Rate below zero, due to the questionable benefits of such a step.

Dean Turner, economist at UBS Global Wealth Management:

Before the Open newsletter: Start your day with the City View podcast and key market data

“As expected, the Bank has kept interest rates unchanged at today’s meeting. However, speculation of changes to the base rate, with the potential of negative rates, refuses to go away – this genie is going to be very hard to get back into the bottle now that it has been released. 

“At this stage, we don’t believe the Bank will take rates lower this summer, let alone into negative territory.

“We may, however, see some evolution in the funding schemes for banks, to support lending to the economy. This could raise a few eyebrows, but has the potential to be more successful in increasing the flow of credit than cutting base rates alone.

Rupert Thompson, Chief Investment Officer at Kingswood: 

“The BoE, as widely expected, increased the size of its quantitative easing program by £100bn to £745bn and a further top up is quite likely later in the summer. 

“The Bank has been purchasing almost all the gilts issued in recent months to finance the covid-related support measures and would otherwise have reached its limit in July. 

“The Bank rate, by contrast, was left unchanged at 0.1 per cent.  While the Bank has been looking into the possibility of pushing rates into negative territory, this would be a move of last resort and only be implemented if the economic recovery now starting to get underway runs into problems later in the year. ”

Andrew Sentance, former MPC member:

“We are on monetary policy by autopilot here in the UK. The BoE injects more QE with little evidence to support the view this is what the economy needs. 

“Monetary growth is already surging and the main constraint on the economy is the lockdown, not monetary policy”.

Rachel Winter, Associate Investment Director at Killik & Co:

 “As interest rates remain at historic lows, the reality is that we may see them stay at this level, or even drop to negative as early as next year.

Read more: We must be ready for further stimulus, says Bank of England’s Andrew Bailey

“The prospect of negative rates has only recently been floated by the central bank due to the UK-wide lockdown having had a far greater hit on the economy than predicted, with a 20.4 per cent contraction in April – another record.

“For now, the fresh round of QE will provide another cash injection; perhaps biding time until we can start to see the effect of lockdown restrictions easing.

Share:
Tags: