01-5-2020 10:17:5901-5-2020 10:10:50The Bank of England kicked off Budget day in the UK today by slashing interest rates by 50bp to 0.25%. While one can question the efficacy of such a move in the headline rate, lower rates won’t get people travelling or spending if they are self-isolating.
The key component of this morning’s announcement was the decision to roll out a new term funding scheme, with additional incentives for SME, financed by central bank reserves, at £100bn. This is welcome and is likely to be designed to allow the UK banking sector leeway to extend forbearance for otherwise good businesses, as well as mortgage holders undergoing cashflow problems as a result of a slowdown in demand. Companies that rely on consumption as well as footfall are already seeing a drop of in demand and this extra cash, it is hoped, is designed to be able to help in that.
The pound has slipped back, sharply however this move is likely to be have been timed to coincide with some significant fiscal measures which could well be outlined later today in Chancellor of the Exchequer Rishi Sunak’s first Budget.
UK gilt yields, rather than slipping back have jumped by 8bps, perhaps on expectation that today’s fiscal stimulus could be a large one, or it could be a case of simply selling the rumour and buying the fact.
We shall have to wait and see but we should pay close attention to construction stocks, as well as the housing sector when the chancellor's steps up later today. We can also expect to see extra money for healthcare, even without this morning’s surprise news that junior health minister Nadine Dorries has been diagnosed with coronavirus. She has been working closely with both health secretary Matt Hancock and Prime Minister Johnson in crafting the UK response to the rising caseload on the NHS.
It is also being reported that the European Central Bank governing council is meeting right now, though this can’t be confirmed, however with the Bank of England following the US Federal Reserve in slashing interest rates, all eyes will now be on the ECB.