Bridgewater Associates, one of the world’s largest hedge funds, and perhaps the most recognisable name in the industry, has given the Bank of England’s new stimulus package the thumbs up in a note circulated to clients.
Analysts from Bridgewater — which manages around $150 billion of assets globally — said in a note sent on Friday the actions of governor Mark Carney and the rest of the Monetary Policy Committee on Thursday were “appropriately aggressive” in trying to tackle the coming storm facing the British economy.
The bank cut interest rates to a historic low of just 0.25%, and launched a £70 billion programme of quantitative easing, including an unprecedented £10 billion dedicated to buying investment grade bonds from companies with substantial UK operations.
The rate cut was widely expected, with markets pricing an almost 100% chance of the cut happening, but the extension of bond buying, while not massively shocking, was not as widely expected.
Those actions, say Karen Karniol-Tambour and Melissa Saphier from Bridgewater, were the right way to go. Here’s the extract from Bridgewater’s analysis (emphasis ours):
“The Bank of England eased on Thursday, responding to the slowdown that is likely taking place in the UK following the Brexit vote. We think the BoE’s stimulation package was appropriately aggressive given today’s conditions, which present significant risks of “pushing on a string.” UK rates and spreads are already very low, though not as compressed as in Europe and Japan.
And like the ECB and the BoJ, which are struggling with easing effectively, the BoE is augmenting interest rate cuts and QE purchases of government bonds (which have limited effectiveness) with policies attempting to activate spenders in the economy more directly, by buying corporate bonds and offering cheap financing to banks. These are logical levers to use, given that the effectiveness of monetary policy is weak and the risks are asymmetric. That the BoE acted swiftly, before there was a chance for a downturn to become more entrenched, puts them in a better position as well.”
Bridgewater’s analysts also note the Bank of England’s actions won’t just have a positive impact on the British economy and markets, which is understandably the bank’s focus, but also on global financial markets and conditions. While Brexit is obviously going to impact the UK economy in the most material and substantial manner, spillover effects are expected, although — in Europe at least — those effects seem not to have hit yet.
Here are Karniol-Tambour and Saphier once again (emphasis ours):
“Under such circumstances, the currency takes on a more prominent role as a lever of monetary policy, and the UK’s balance of payments conditions are conducive to a currency depreciation. Beyond the domestic impact, as the BoE’s money printing circulates through the financial system, the expansion in liquidity should on the margin have a favourable impact on global asset markets and conditions. The BoE’s moves represent another incremental step by developed world central banks to provide sufficient stimulation. There is now significant liquidity production from three of the world’s major central banks, and still a cautious attitude on the part of the Fed. This should reinforce the global move from cash to assets.”