BoE: More is to come if needed - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, notes that yesterday saw the BoE cut interest rates for the first time in seven year with another 25bp reduction taking the base rate to 0.25%.

Key Quotes

“That was widely expected. Not expected was that Governor Carney would increase QE by GBP60bn, including GBP10bn in corporate bond purchases, and add a new Term Funding Scheme (TFS) to boost liquidity further. There was also a clear promise that more is to come if needed, except negative interest rates and helicopter money. In short, a hyper-active central bank is right at the centre of things - again.

Most interesting, however, was what the BoE said: (i) that it can’t do anything about structural problems; (ii) that weaker GBP is expected to halve the current account deficit in three years; and (iii) that it has made no assumption on a change in fiscal policy. To my perhaps-jaded eyes those collective statements summarise why we have such activist central banks – and yet arguably why we don’t need to, or shouldn’t.

Indeed, if monetary policy can’t change a structural economic problem, why force in yet more liquidity to the already-stuffed market? Recall that ultra-low rates and QE have only succeeded in pushing up asset prices, while that ‘asset-rich/income-poor’ split within British society contributed greatly to the Brexit vote. Likewise, the drop in GBP, which the BoE didn’t want to see given it was anti-Brexit, is now going to halve the current-account deficit and rebalance the economy, apparently. Lastly – and even some central bankers will share my frustration here – why have politicians abrogated their duties so badly that we are left with the policy mix equivalent of trying to eat soup with an ever-more expensive fork?”