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Bank of England wields the sledgehammer

A 25 basis point cut in rates, an additional £60bn of QE and £10bn of corporate bonds as the Bank of England throws the kitchen sink at the UK economy on the basis of six weeks of economic data, which does have a tendency to be volatile at the best of times.

Certainly Brexit was an unexpected event however today’s response contrasts with the measured response in the wake of the surprise referendum result in June.

The three week time lag between July’s hold decision and today’s decision to go all in does smack a little of a panic measure and the proverbial sledgehammer to crack a nut. Has the outlook changed that much in three weeks on the basis of some disappointing survey data?

The pound has dropped sharply as have bond yields as the Bank of England managed to meet and partially exceed market expectations on what was expected. The resulting fall in sterling has also helped push the FTSE100 and FTSE250 sharply higher though it is notable that Royal Bank of Scotland and Lloyds Banking Group shares has lagged behind.

It would seem that while there was consensus on a rate cut there were some divisions on further quantitative easing with three policymakers dissenting.

The bank’s rationale would appear to be that the MPC has significant concerns about a slide in growth prompting a sharp revision lower of their growth forecasts for GDP in 2017 and 2018. 2017 forecast was slashed to 0.8% from 2.3%.

The problem with forecasts is that they tend to be very fluid and in the words of Warren Buffett “forecasts may tell you a great deal about the forecaster, they tell you nothing about the future”, and given the Bank of England’s track record there is no reason to suppose these estimates are any likely to be more accurate than their previous ones

The committee appear to have set aside concerns about the effect of lower rates on UK bank profitability and resilience in favour of showing that the Bank remains prepared to act to support the economy. That’s before you look at the potential effects on pension fund liabilities which are likely to grow even more.

While policymakers will trumpet these measures as means to boost lending, as Mark Carney has repeatedly stated the availability of credit isn’t the problem, it’s the demand side, and with interest rates already at record lows before today’s measures, why would anyone think that businesses are more likely to borrow now than they were a week ago.

It would appear that the MPC is still in the same groupthink mode that most central banks have been in for the last few years, far better to have waited until the Autumn Statement and co-ordinated their policy response with any latest government measures to help the economy into 2017.

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