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 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.
The introduction of corporate bond buying is of particular interest to the markets since it has only briefly been experimented with in the past — when the bank purchased small amounts of corporate bonds at the beginning of its previous QE scheme.
So how did markets react following the announcement? Given the lack of a major shock from the Bank of England in its decisions, markets didn’t move massively, but here’s a round-up of how markets responded to Britain’s first interest rate change in more than seven years:
Sterling fell off a cliff as the rate cut was announced, dropping around 1.5% immediately afterwards, before recovering slightly as governor Mark Carney spoke to reporters and laid out his reasons for today’s action. Since then sterling has remained broadly unmoved.
Here’s the chart:
The pound’s drop since the vote to leave the European Union has been huge, with sterling falling by around 12% against the dollar in just a couple of sessions, and declining below $1.29, a new 31-year low. As of around 5:00 p.m. BST (12:00 p.m. ET) sterling remains down by roughly 11.7% since the day of the referendum.
In the medium term, it is expected that the pound will likely continue to fall against most major currencies, with predictions of the currency’s bottom ranging from $1.20 at Goldman Sachs, to$1.15 from Deutsche Bank, all the way to $1, a prediction made by former PIMCO executive Mohammed El-Erian.
Stocks went the opposite way to the pound following the decision, with the FTSE 100 jumping more than 1.5% immediately after the decision. Much of that benefit came from sterling’s fall on the day. Around 70% of the revenue of the companies that make up the FTSE 100 is derived from abroad, meaning that when sterling is weak, they make more money. After an initial post-referendum crash, the FTSE 100 has gained substantially, and is now at a 12-month high, leading some to suggest that it is “masking” the post-Brexit economic impact.
Here’s a look at how the FTSE performed on the day:
The FTSE 250, which is home to a larger proportion of companies that are truly domestically focused, also rallied on the day, with companies taking comfort from the prospect of a cash injection from the Bank of England’s new corporate bond buying programme. Here’s how it looked:
Elsewhere on the continent, stocks enjoyed a strong day, boosted by the FTSE’s rally and a small step-up in overall sentiment. Here’s the scoreboard:
Across the pond, all three of the USA’s major indexes, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq are all marginally higher.
Bond yields tumble, prices jump
Bond yields tumbled on the news of the Bank’s fresh stimulus, with Britain’s benchmark 10-year Gilt falling to a record low below 0.64% for the first time in history. Here’s the chart:
Yields were already at record lows as a combination of negative interest rates at the Bank of Japan, ECB, and several other peripheral central banks and strong demand for sovereign debt have combined to create the low-yield environment. Yields have fallen so far that more than $12 trillion of government debt worldwide is now trading with negative yields, and large portions of government debt from many countries is now below zero.
Yield moves inversely to the price of the bond on the market. The more people want the bond, the higher the prices go, and the lower the yield. Another way of looking at it is how much investors want to be paid to bear the risk of the bond.
In theory, Mark Carney’s assurance that he will not take the Bank of England’s base rate into negative territory while he is governor, means that British bonds now have a concrete floor, below which they cannot fall.