The Bank of England acted like a “cornered lion” on Thursday as it unleashed an unexpectedly large new package of stimulus for the British economy in the wake of the country’s decision to leave the European Union, according to one of Deutsche Bank’s best-respected strategists.
Writing on Friday in his daily “Early Morning Reid” note, Deutsche’s Jim Reid — who is renowned for his irreverent style of writing — noted that while an interest rate cut was expected, the bank’s new quantitative easing programme was a little more left field. Here’s the quote from Reid (emphasis ours):
“The BoE reacted like a cornered lion yesterday as they loosened policy more than expected and in a fairly wide reaching manner. This was after the bank made its largest downgrade to its growth forecasts (including 2017 down from 2.3% to 0.8%) since the creation of the MPC back in 1997. As DB’s Mark Wall expressed, the 25bp rate cut was in line with expectations, but this came with a plethora of additional policy moves: a new GBP100bn four-year Term Funding Scheme (TFS) to aid the transmission of monetary policy at low interest rates through the banking system (an unexpected innovation); GBP60bn of gilt-based QE over the next 6 months (they had thought this would wait until September, but the pace of purchasing is about half the rate they were assuming); and a corporate QE programme of up to GBP10bn.”
As Reid expresses, the Bank of England cut interest rates to a historic low of just 0.25% on Thursday, 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 move was broadly designed to fight off the coming economic storm in Britain, following the Brexit vote. Several recent forecasts,including those from Credit Suisse and Barclays, suggest that Britain is plunging toward recession.
Reid goes on to argue that the bank shouldn’t expect their easing measures, the first new action from the Old Lady of Threadneedle Street since 2009 — to be a means of curing all ills for the British economy, noting that unprecedented levels of policy action from central banks all over the world in recent years haven’t stimulated the desired inflation or growth intended. Here’s more from Reid (emphasis ours):
“The breadth of the policy response was impressive but as other central banks have found you can lead a horse to water (i.e. enhance the supply of bank credit) but you can’t make him drink (i.e. create aggregate demand) so these measures are unlikely to be a panacea but as Mark Wall suggests it gives the BoE some breathing space before there’s a fiscal response in the autumn.”