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Bank of England holds base rate at 0.1% and warns of sharp recession

The Bank of England has held its base rate at 0.1% but warned it expects a sharp recession in the first half of the year as a result of the coronavirus restrictions.

In its May monetary policy report, the bank noted that the spread of Covid-19 and the measures to contain it were having a significant impact on the United Kingdom and many countries.

“Activity has fallen sharply since the beginning of the year and unemployment has risen markedly. Economic data have continued to be consistent with a sudden and very marked drop in global activity,” it stated.

However, the Bank of England also highlighted that there were some “tentative signs of recovery” in countries that were starting to relax restrictions and that financial markets had recovered in part.

And indicators of UK demand have generally stabilised, albeit at very low levels, in recent weeks after “unprecedented falls” during late March and early April.

Banking stability

The central bank believes the core banking system has “more than sufficient” capital to absorb expected losses and that there will be capacity to provide credit to support the UK economy.

In its scenario, it is anticipating that overall economic activity (GDP) will fall 14% in 2020 but rebound by a similar amount in 2021, although it will not reach its pre-coronavirus size until the middle of next year.

Household spending is expected to follow a similar pattern to GDP, but consumer savings is anticipated to rise sharply this year but then fall back in the next two years.

This will have an impact on inflation, as will falls in oil prices, with inflation potentially hitting 0.6% over 2020 as a whole and reaching zero at the end of the year.

Unemployment is predicted to double to around 8% in 2020 but return to around the pre-coronavirus position in 2022.

The scenario also assumes the UK will complete an orderly free trade agreement with the European Union at the end of the year, however this is not certain and disagreements during negotiations have been public from both sides so far.

Kevin Brown, savings specialist at Scottish Friendly, said: “The Bank of England’s report on the economy makes for bleak reading, but it is still holding out hope for a reversal of much of the economic misfortune the country is suffering thanks to coronavirus, by the middle of next year.

“Markets have largely responded to the crisis already and much of this fresh economic data is already priced in. It is impossible to predict a bottom, but one thing’s for sure, savers won’t find succour in a savings account paying 0.5% interest.

“It’s a tough time for savers out there and many are being caught out by the speed at which rates on cash accounts are changing. The signals given out by the Bank of England suggest the base rate is going nowhere and this should be a catalyst to anyone with a savings pot to make sure they’re getting the best out of it, by considering ways to maximise their potential returns.

“Many high street banks, building societies and challenger banks are cutting rates but there can still be ways to generate above inflation returns by exploring alternatives such as regular savings accounts, longer fixed-rate ISAs and stocks and shares.”

Written by: Owain Thomas

Source: Your Money

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Bank of England rate preview: markets braced for GDP forecasts

Andrew Bailey hosts his second BoE meeting, but the volatility could come from forecasts rather than any shift in their monetary policy framework.

When and where?

With the Covid-19 crisis keeping everyone locked up, the forthcoming Bank of England (BoE) monetary policy meeting will be virtual, taking place on Thursday 7 April 2020. Most notably, this announcement will take place at 7am local time, rather than the usual midday timing.

Will we see any change to monetary policy?

The coronavirus crisis has seen central banks across the globe push the boat out in a bid to minimise the fallout from global lockdowns that have affected businesses and individuals alike.

In the UK, Governor of the BoE Andrew Bailey didn’t mess about, slashing interest rates to 0.10% and expanding the quantitative easing (QE) program by £200 billion in his first week as the governor. That QE programme stands at £645 billion, and remains a tool which could be expanded when it is deemed necessaryto support the governments push to mitigate the virus fallout. Some have speculated that the timing of this meeting (pre-market open) could highlight a potential market moving announcement such as further QE in the offing. On the interest rate side of things, there is arguably little left to benefit from implementing lower rates, with the restrictions on movement and businesses inhibiting the ability to borrow and invest.

With that in mind, markets are currently pricing in a 99% chance that the committee will keep rates steady at the forthcoming meeting.

What should we look out for?

Perhaps the most interesting part of the meeting comes in the form of the forward looking guidance on where inflation and particularly growth could be in the quarters ahead.

With UK prime minister Boris Johnson showing few signs of reopening the economy in the coming weeks, the global growth picture for second quarter (Q2) is dour. For markets, this expectation of huge economic contraction could see the pound hit hard, with some looking for a figure in the -35% region for the quarter. From an inflation perspective, we are seeing global disinflation take hold, and that is likely to be reflected in forecasts. Remember that low inflation also means looser monetary policy for the foreseeable future irrespective of the coronavirus response needs.

Aside from the growth and inflation forecasts, markets will also be on the lookout for guidance on how the BoE sees the recovery playing out. Thinking back to the Federal Reserve (Fed) and European Central Bank (ECB) meetings from last week, there has been a clear focus on avoiding expectations of a sharp v-shaped recovery for growth, with the road back to health likely to be drawn out given the speculation that it could take over a year to create a vaccine or cure for this virus.

Where now for the pound?

The pound has been on the rise since its mid-March low, with the pair ultimately reaching resistance at the 200-day simple moving average (SMA) level. That has proven a key roadblock to further gains, with the second attempt to break higher once again faltering at that indicator.

This could be a bearish signal coming into play, with the rally seen over almost two-months looking like a potential retracement and precursor to further downside. Much of that sentiment will be driven by wider market movements, with GBP/USD looking remarkably like the FTSE 100 given the inverse correlation between the dollar and global stocks. Nevertheless, there is a chance we could see the pound suffer if forecasts signal potentially a huge decline in Q2 gross domestic profit (GDP).

With that in mind, we could ultimately top out at the 200-day SMA, with a breakdown below 1.2247 providing a bearish reversal signal. As such, the wider outlook will be determined by the ability to break either 1.2247 or 1.2648.

By Joshua Mahony

Source: IG

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Bank of England brings forward release time of May 7 rate decision

The Bank of England said on Friday it will release the result of its next Monetary Policy Committee meeting at 7 a.m. (0600 GMT) on May 7, rather than at the usual release time of 12 p.m.

“This is to accommodate the joint publication with the interim Financial Stability Report,” the BoE said.

As well as the MPC’s decisions on interest rates and bond-buying and its new economic forecasts in a quarterly Monetary Policy Report, the BoE has brought forward a meeting of its Financial Policy Committee to assess the impact of the coronavirus pandemic on the finance industry.

BoE Governor Andrew Bailey will brief reporters after the decision, and the contents of the briefing will be made public at 0900 GMT.

The BoE cut rates twice in March to a new low of 0.1% and ramped up its government bond-buying by a record 200 billion pounds. It is expected to hold off on fresh monetary policy action next week, according to a Reuters poll of economists.

Reporting by David Milliken; Editing by William Schomberg

Source: UK Reuters

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UK economy will suffer extremely large hit from coronavirus, warns rate-setter

Britain will suffer an “extremely large” hit to spending in the economy from the coronavirus lockdown – and monetary policy and Government actions cannot fully offset the impact, a Bank of England policymaker has warned.

Silvana Tenreyro – one of the Bank’s nine Monetary Policy Committee (MPC) members – also cautioned the UK recovery is likely to be “less V-shaped than one would like”, suggesting the bounce-back may not be as immediate as previously hoped.

In a speech broadcast online, she said the Bank stood ready to “do whatever it can” to help lessen the blow to households and businesses.

But she stressed monetary policy cannot “tackle such difficulties alone” and warned that even together with the Government’s mammoth emergency support, there will still be rising unemployment and shrinking output.

Ms Tenreyro said: “The data we have so far suggest that the drop in aggregate spending already taking place will be extremely large.”

She added: “Given the scale of the shock, it will not be possible to avoid further consequences for the economy.

“There will be a fall in employment where businesses fail or workers are made redundant.

“These occurrences should be ameliorated by the policy measures that have been put in place, but will not be prevented in full.”

She stressed that even without the lockdown and restrictions put in place, gross domestic product would have fallen sharply as Britons increasingly opted to stay at home.

“The fall in demand was clear in high-frequency indicators such as restaurant bookings and retail footfall, which fell sharply even before the Government’s decision to close restaurants and shops,” she said.

The Bank is forecasting inflation to fall below 1% from 1.7% currently in the next two months as fuel costs plunge thanks to crashing oil prices.

But while Britons will see rises in the cost of living ease, they will be knocked by falling wage growth, according to Ms Tenreyro.

She said: “Despite the policy responses, we will not be able to avoid a rise in unemployment, which will weigh on real wage growth across the economy.”

While some firms will see a rise in demand by offering alternatives, such as online food and grocery services to replace cafes and restaurant, she said this will be outweighed by the overall fall in spending due to falling incomes and consumer uncertainty.

She said: “Covid-19 is having unprecedented effects on all of our lives.

“The MPC, co-ordinating closely with other policymakers in the Bank and in government, will do whatever it can to minimise the economic disruption that the crisis could cause for households, businesses and financial markets.”

The Bank has already slashed interest rates to a new all-time historic low of 0.1%, from 0.75% previously, and unleashed another £200 billion of quantitative easing (QE) among a raft of actions to help the economy weather coronavirus.

But the Bank has already previously said it sees little benefit in taking rates below zero, suggesting it will have to look to more QE or radical options if further monetary support is needed.

Ms Tenreyro admitted the MPC is in unprecedented territory with the current crisis.

“The nature of the economic shock from Covid-19 is very different from those to which the MPC has previously had to respond,” she said.

Source: Express & Star

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Bank of England injects £1.9bn into UK companies via coronavirus scheme

The Bank of England has injected £1.9bn into UK companies since 23 March via its short-term lending programme, figures have shown, as it tries to shore up the economy amid the coronavirus outbreak.

The lending comes via the Bank’s covid corporate finance facility (CCFF), through which it buys companies’ short-term debt, known as commercial paper.

The CCFF is a key plank of the government’s £330bn coronavirus lending programme. It hopes the money will mitigate disaster for the economy during the coronavirus pandemic.

Threadneedle Street has unveiled a range of other measures to boost the economy. These include slashing interest rates to 0.1 per cent, a record low, and pledging to buy £200bn more government and corporate bonds.

Following the playbook from the 2008 crisis, the Bank has also reopened “swap lines” with the US Federal Reserve. UK banks claimed $6bn (£4.8bn) yesterday via this facility to help ease the pain on their balance sheets.

The uptake for the CCFF comes as warnings grow about the effect of coronavirus on the global and UK economies.

Ratings agency Fitch today predicted the UK economy will shrink by 3.9 per cent in 2020. And figures yesterday showed claims for benefits via Universal Credit soared to 950,000 in the last two weeks.

Worries over access to lending

The government and BoE have been criticised for some confusion about the lending schemes on offer, however.

Business groups such as the CBI have said some firms are “falling through the cracks”. They say some businesses do not have the “investment grade” credit rating needed to access the CCFF, but are too big for the other loan programmes on offer.

S&P Global Ratings told City A.M. that it had received around 30 enquiries by Monday from UK firms that hope to be rated investment grade – at low risk of default – so as to access the CCFF.

But S&P’s head of EMEA sales Lynn Maxwell said that “less than 25 per cent” of the firms expressing interest “have investment grade potential”. She added that it is “early days,” however.

Chancellor Rishi Sunak has promised to help broaden the reach of UK loan programmes. He has said the government is working on making sure all companies can get the help they need.

By Harry Robertson

Source: City AM

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Bank of England extends emergency liquidity measure

The Bank of England said today it would extend an emergency liquidity measure, the three-month Contingent Term Repo Facility (CTRF), to run until the end of April and it would also hold a one-month CTRF operation each week until 1 May.

The Bank reactivated the facility last week as part of its attempts to keep financial markets running smoothly during the coronavirus crisis.

“The Bank will continue to monitor market conditions carefully and the operation of the CTRF remains under review,” it said in a statement today. “The Bank stands ready to take additional action if necessary.”

The Bank said the move was “a further precautionary step to provide additional flexibility in the Bank’s provision of liquidity insurance over the coming months”.

It said CTRF operations will run in addition to its regular liquidity insurance facilities including the Indexed Long-Term Repo and Discount Window Facility.

Other measures the Bank has taken to tackle the coronavirus-triggered economic crisis include cutting interest rates to a record low of 0.1 per cent to help pump liquidity into the economy.

It has also ramped up bond-buying, pledging to purchase £200bn more debt.

The Bank’s new governor Andrew Bailey took over the top job earlier this month at a time of economic turmoil across the globe.

The economic paralysis that has followed in the wake of the coronavirus outbreak has sent stock markets crashing and left many companies and their workers on the brink.

By James Booth

Source: City AM

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Coronavirus: Bank of England holds rates but paints gloomy economic picture

The Bank of England has kept interest rates on hold at the record low level of 0.1 per cent but signalled it is prepared to take further action to tackle the effects of coronavirus.

The Bank’s monetary policy committee (MPC) today said it “stands ready to respond further as necessary to guard against an unwarranted tightening in financial conditions, and support the economy”.

Threadneedle Street also gave a gloomy assessment of the economy. The MPC said: “The economic consequences of [coronavirus] are becoming more apparent and a very sharp reduction in activity is likely.”

The Bank slashed interest rates to 0.1 per cent at two emergency meetings over the last two weeks. That is the lowest interest rates have ever been in the Bank’s 325-year history.

The rate cuts were designed to pump liquidity into the economy during the coronavirus outbreak. It is also meant to shore up lending and balance sheets.

The BoE has also ramped up its bond-buying, pledging to purchase £200bn more debt. It said today it will continue with this quantitative easing. The Bank added: “If needed, the MPC can expand asset purchases further.”

On top of this, the Bank has cut so-called capital buffers for banks, giving them more cash to lend. It will also buy companies’ short-term debt.

The Bank of England today decided to maintain current policy for the time being. But it said it is prepared to take further action if needed.

The MPC added that it is looking at “the pass-through to banks and building societies’ lending rates of the recent reductions in bank rate”.

Ensuring the extra liquidity reaches the right firms has been a concern of the Bank. It yesterday sent a letter to banks, along with the government and the City watchdog, telling them to keep lending to businesses to ensure that previously viable companies do not fail due to the crisis.

Risk of ‘longer-term damage to the economy’

The Bank of England today gave a stark assessment of the outlook for the UK economy. However, it warned predictions were currently deeply uncertain.

“There is a risk of longer-term damage to the economy, especially if there are business failures on a large scale or significant increases in unemployment,” the MPC said.

“There is little evidence as yet to assess the precise magnitude of the economic shock from Covid-19. It is probable that global GDP will fall sharply during the first half of this year. Unemployment is likely to rise rapidly across a range of economies, as suggested by early indicators.”

Paul Dales, chief UK economist at consultancy Capital Economics, said: “After unleashing unprecedented support in two emergency meetings over the past two weeks, the Bank of England took a break today.”

However, he said that if stress starts to show in the UK’s bond markets, “expect the Bank to do more by providing more liquidity and/or increasing its asset purchases”.

He suggested the BoE might follow the US Federal Reserve and “announce open-ended asset purchases”.

By Harry Robertson

Source: City AM

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Bank of England will ‘closely’ monitor credit to economy amid coronavirus crisis

The Bank of England’s Financial Policy Committee (FPC) said it will “monitor closely” the credit conditions facing the economy amid the coronavirus pandemic, and stands ready to take further actions if needed.

In minutes from recent meetings released this morning, the Committee said it “stands ready to take any further actions deemed appropriate to support UK financial stability”.

It described the “nature and global impact” of the shock caused by coronavirus and the speed with which it has spread as “unprecedented in recent history”.

The FPC said it “judges that major UK banks are well able to withstand severe market and economic disruption”, having “built up the resilience of the UK financial system over recent years”.

It also deems “household vulnerability is considerably lower than before the financial crisis”.

The Bank of England has twice slashed interest rates in response to the coronavirus outbreak, with the Bank’s main rate reaching a record low of 0.1 per cent.

The BoE has also launched a £200bn money-printing programme in a bid to calm panicked markets and support the economy.

Its FPC and Monetary Policy Committee (MPC), has also introduced measures to reduce financial stability risks associated with the pandemic and to keep credit flowing into the economy.

These include cutting the UK’s countercyclical capital buffer rate to zero per cent of banks’ exposure to UK borrowers, in the hope this would release up to £190bn of bank lending to businesses. The rate had been at one per cent and was due to reach two per cent by the end of the year.

Last week, the BoE cancelled this year’s stress tests of major banks in Britain and pushed back the implementation of new capital rules to help banks focus on supporting customer lending during the pandemic.

The FPC said today that the UK’s major banks have Tier 1 capital levels — a key measure of financial strength — over three times higher than before the global financial crisis.

“Businesses and households should be able to turn to the banking system to meet their need for credit to bridge through this period of economic disruption.”

It added that it “will monitor closely the response of banks to these measures as well as the credit conditions faced by UK businesses and households more generally”.

By Anna Menin

Source: City AM

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Bank of England Slashes Interest Rates Again, to Record Low of 0.1%

The Bank of England cut interest rates for the second time in two weeks, to bolster the economy against the coronavirus epidemic.

The latest cut, announced Thursday, took interest rates from 0.25% to 0.1%—the lowest level in the Bank’s 325-year history.

The bank also increased its quantitative easing stimulus package, buying an additional £200 billion of UK government and corporate bonds to pump cash into the economy and keep down the cost of borrowing.

New governor Andrew Bailey, who took over from Mark Carney just Monday, said the measures were designed to calm markets spooked by the mounting death toll from COVID-19, crises in other economies and rumours that London will soon be forced into complete lockdown.

“The obvious increase in the pace and severity of Covid-19, which has built during the week, was something we had to assess and respond to, we can’t wait for the hard economic data before we act,” he said.

Markets reacted optimistically to the news, with the FTSE ending the day up 1.4% and the pound rising against the dollar.

The cut in interest rates and quantitative easing are “highly unlikely to highly unlikely to prevent a sizeable hit to [UK] GDP this year,” analysts at Japanese investment bank Nomura said. But they added, “there can be no question that the monetary and fiscal authorities are throwing everything they can at this problem to support firms and households, cushion demand as much as is reasonably possible, and to reduce the long-term hit to supply.”

However, there will be questions about what further action the Bank of England can take, after Bailey reiterated his reluctance to use zero or negative interest rates.

Bailey said the Bank was considering further monetary boosts it could make. “We are not done. The Bank of England will do what the public needs in the days and weeks ahead.”

As interest rates plunged, some lenders moved quickly to withdraw tracker mortgages from the market.

Henry Jordan, Mortgage Director at Nationwide, said: “With a second cut in interest rates in just over a week, bringing Bank Rate down to an unprecedented 0.1%, we have taken the decision to temporarily withdraw all of the society’s residential tracker mortgages from sale.”

Other lenders, including Barclays, HSBC and Santander, said they would reduce their tracker and variable rate mortgages in line with the new Base Rate.

Among HSBC’s tracker mortgages is a two-year deal which charges just 0.64% above the Bank of England base rate. Now pegged at 0.74%, the deal is believed to be the lowest interest rate ever offered for new mortgages. It’s available to buyers with a 40% deposit, on properties worth up to £5 million—but buyers will need to act quickly. Brokers expect it too will be withdrawn from the market by next week.

Broker Aaron Strutt of Trinity Financial said the recent cuts had demonstrated the value of tracker mortgages. “About 95% of mortgages are on a fixed-rate basis, but if you’d taken out a tracker a couple of months ago your rate would have effectively halved.”

Source: Money Expert

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Bank of England could lower rates further to shield against coronavirus hit

The Bank of England is expected to further cut interest rates and restart quantitative easing to ease the impact of coronavirus on the economy, as former Financial Conduct Authority (FCA) chief Andrew Bailey replaces Mark Carney as governor.

Bailey starts his new job today and is now tasked with steadying the economy against a shock from the outbreak.

One of his first moves could be to cut interest rates as low as 0.1 per cent in the coming weeks, economic experts have predicted.

The Bank of England last week cut interest rates to 0.25 per cent from 0.75 per cent.

And further measures aimed to shore up banks and the economy were yesterday announced by the Bank of England, in a coordinated move with the Canadian, European, US, Japanese and Swiss central banks.

Monetary policymakers have essentially cut the cost and increased the volume of loans it can provide to banks in US dollars, as the US Federal Reserve cut US interest rates over the weekend.

Paul Dales, chief UK economist at Capital Economics, said: “The coordinated action to boost liquidity for banks announced late last night by the Bank of England is designed to prevent the current coronavirus health and economic crisis from spiralling into a full blown financial crisis.

“The idea is that this will nip in the bud last week’s signs that banks are becoming less willing to lend to each other in money markets, which is what caused major problems during the financial crisis.

“We know that a big economic hit is coming, but can only speculate about its size and duration. For what it’s worth, we think a short-term hit to GDP of around 2.5 per cent is possible. While we think (hope) that a financial crisis, which would deepen and lengthen that hit, will be avoided, we do think the Bank of England will have to do more by cutting interest rates by a further 15bps to 0.10 per cent and restarting quantitative easing.”

Samuel Tombs, chief UK economist at Panetheon Macroeconmics, agreed the Bank of England is likely to announce new stimulus measures.

He said: “The Monetary Policy Committee (MPC) might be worried that if they overcook stimulus now and add to the downward pressure on sterling, they will only make life more difficult next year.

“But no one can be confident at this stage that the temporary shock from the coronavirus will not evolve into a self-perpetuating downward spiral in demand, reinforced by falling asset prices and tightening credit conditions.

“The near-term bout of low inflation also might have lingering counterproductive effects on inflation expectations and wage growth, if confidence is not shored up soon.

“So despite the medium-term outlook for inflation, we expect the MPC to cut Bank Rate to its effective floor of 0.10 per cent, from 0.25 per cent, at its scheduled meeting on March 26, and then to restart its QE programme at its meeting on May 7.”

Written by: Lana Clements

Source: Your Money