BoE announces emergency easing package

Emily Nicol
Chris Scicluna

Overview:
In an emergency decision, before UK markets opened the BoE cut Bank Rate by 50bps to 0.25%, matching its record low. While it left its targeted stock of asset holdings unchanged, the MPC also introduced a new. Carney’s press conference is just underway.

The timing of the announcement – which reflects the certainty given to the government’s fiscal arithmetic ahead of today’s Budget statement – might have come as a surprise to many. But the measures should not have done and were effectively priced by the market. So, after an initial wobble, sterling is a touch firmer than its levels immediately before the announcement. Gilts are stronger at the short end but weaker from 7Y on (e.g. 10Y yields are now about 5bps higher at 0.28%). But European stocks have certainly been able to open on the front foot.

European stocks were also given a boost a little while ago by a credible report from Bloomberg reporting second-hand Lagarde's comments to EU leaders yesterday. As well as noting her warning of risks of “a 2008-style crisis” and “the collapse of part of your economies”, the article also reported that ECB policy makers are looking at all tools for their announcement tomorrow, including "measures to provide 'super-cheap' funding and ensure liquidity and credit don’t dry up."

At a minimum, we should expect the Governing Council tomorrow to provide a meaningful rate cut on the TLTROs and/or a new lending facility with a lower interest rate. And given recent upwards pressure on the euro, a cut in the deposit rate, offset by an increase in the tiering ratio, would hardly come as a surprise too. Likewise, an increase in corporate bond purchases could be justified. Certainly, a substantive package of measures, rather than a token gesture, might seem in orde

Despite yesterday’s rip-roaring showing on Wall Street (the S&P500 closed up just shy of 5%), however, East Asia’s stock indices weakened across the board today before the flurry of activity in Europe. Japan’s TOPIX closed down 1½% even after the yen had depreciated yesterday close to 105/$. China’s CSI300 dropped at a similar rate ahead of the subsequent release of data revealing a plunge in credit growth last month. And US stock futures fell too.

In bond markets, meanwhile, UST volatility remains intense, with yields earlier this morning down more than 10bps across the curve from yesterday’s close (10Y yields were down about 14bps to 0.66%, still more than 30bps above Monday’s trough, before edging higher). JGBs, however, made losses at the short end (2Y yields up 2½bps to -0.235%) even though the BoJ might next week feel compelled to follow the BoE’s lead with a rate cut. But ACGBs reversed much of yesterday’s losses (2Y yields down 7bps to 0.42%) as RBA Deputy Governor Debelle flagged the likelihood that the RBA would consider a move to BoJ-style yield curve control – with an emphasis on the short end of the curve – after the cash rate is cut to its effective floor of 0.25%.

In the euro area, core govvies are weaker and BTPs are firmer this morning, with the moves already in play before the Bloomberg report on Lagarde. Contributing to that sentiment, the European Commission agreed yesterday to clarify by the end of the week how new support measures to manage the impact of the coronavirus will be accommodated within the EU’s fiscal rules. The Italian government now plans to double once again its planned package to up to €16bn (a little less than 1.0% of GDP) although that will not prevent the economy from deep recession following the implementation of the national lockdown rules. At a minimum, we would certainly expect France and Spain to step up to the plate with proposals for a lot more fiscal support soon too.

UK:
The MPC’s emergency policy easing this morning takes Bank Rate to 0.25%, about 15bps above the BoE’s assessment of its likely floor. At this stage, not least given the substantive fiscal easing that is set to be announced by the Government later today, we do not expect a further cut this cycle.

The new Term Finding Scheme (TFSME) should also be expected to give support to UK economic activity, or at least help reduce the near-term downside risks. In particular, under the scheme, the BoE will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs). The BoE reckons that this could provide more than £100bn in term funding to the real economy.

The timing of the BoE’s decision to cut rates reflects the finalisation of the UK Government’s new fiscal arithmetic, which will be announced later today. This will confirm plans for significant fiscal stimulus for the first time since the Global Financial Crisis, and probably by the most in almost three decades.

Among other things, the government will likely relax its fiscal rules to allow for an increase in the profile of net public borrowing from about 1¼% of GDP in the current fiscal year to close to 3% of GDP by FY23/24. While a key focus will be the government’s new infrastructure plan, an increase in certain categories of current expenditure is also expected, including additional spending on measures to respond to the coronavirus. On the revenue side, amid certain targeted tax hikes, there might also be a handful of reductions, including possibly even a cut in the main rates of VAT and/or income tax to give a near-term boost to spending. In the context of the BoE’s new TFSME, we would also expect action to guarantee loans to SMEs that experience a sudden hit to revenue due to the coronavirus, as well as support for workers hit by the epidemic too.

Today will also bring the most notable new UK economic data this week in the shape of the monthly GDP, output and trade figures for January. Following a rise of 0.3%M/M in December, GDP is expected to have increased in January by 0.2%M/M, reflecting modest growth in services and manufacturing output. But having recorded the first surplus since the mid-1980s in December, the goods trade balance is expected to have returned to deficit.

US:
In the US, however, the dataflow will be of interest, with February CPI figures due and likely to underscore the continued well-behaved nature of prices which provides the scope for the Fed to ease policy again if necessary. Core CPI is expected to rise by a modest 0.2%M/M to leave the annual rate unchanged at 2.3%Y/Y. But lower fuel prices will likely weigh, to leave the overall CPI unchanged from January and the headline annual rate dropping 0.3ppt to 2.2%Y/Y. The Federal Government’s monthly budget data are also due. The US Treasury will sell 10Y Notes.

Australia:
In a speech today, RBA Deputy Governor Debelle emphasised that the global and local economies are likely to take a big near-term hit from the coronavirus. But he also reiterated that he expects a swift recovery once the impact of virus passes supported by low interest rates and fiscal stimulus. Indeed, the government looks set to announce tomorrow a fiscal stimulus package reportedly between AUD15-20bn (0.75-1.00% of GDP). But that will not preclude further RBA easing.

Indeed, markets are unsurprisingly fully pricing in a further 25bps cut in the RBA’s cash rate to the Bank’s effective lower bound of 0.25% next month. And Debelle did nothing to dispel expectations that the RBA will move to unconventional monetary policy shortly thereafter. Certainly, in his Q&A, Deballe provided a strong hint that the RBA’s preference would be an “objective” for government bond yields, as keeping the front end of the risk-free curve low for an extended period of time would be analogous to a further interest rate cut. So, rather than a quantity-based QE programme, Debelle implied that the RBA would adopt a BoJ-style yield curve control framework, acting in the government bond market only as necessary to ensure an interest rate path consistent with what the RBA thinks is necessary to return inflation back to target on a sustainable basis.

Despite the RBA’s decision to cut interest rates to a record low 0.50% at the start of the month and continuing signs of improvement in the housing market, the overnight release of the Westpac consumer sentiment survey suggested that households are downbeat about current economic conditions in Australia, not least due to the growing impact from the coronavirus. In particular, the headline confidence index fell 3.8% in March to 91.9, its lowest level for five years and the second-weakest since the Global Financial Crisis.

Within the detail, the households were much more downbeat about prospects for the economy over the coming 12 months, with the relevant index down 12.8% on the month to 77.9, a five-year low. So with heightened uncertainty about the near-term outlook and reported concerns about health risks associated with public places, the share of households assessing it to be a good time to buy major household items dropped a sizeable 4.3% in March to a five-year low, But emphasising that they expect the virus-related disruptions to be large but temporary, the equivalent index for the economic outlook over the coming five years was down just 1.3% to 90.4, while assessments of family finances were relatively stable.

Euro area:
All eyes in the euro area will be on further reports offering insights into tomorrow’s ECB policy announcement, as well as the fiscal plans being rapidly thrown together by national governments to address the spread of the coronavirus, which continues to intensify across the region. The economic data – including Spanish retail sales and Dutch manufacturing output figures for January – will be of little import. In the markets, Germany will sell 10Y Bunds.

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