Old Lady aiming to dampen concern over gilds, tightening conditions

Old Lady aiming to dampen concern over gilds, tightening conditions

Bank of England’s rate cut to 0.1 percent highlights growing concerns over coronavirus’ impact on businesses

Old Lady aiming to dampen concern over gilds, tightening conditions

“The fact that the Bank of England felt compelled to announce additional stimulative measures today – despite its regular March MPC meeting due to take place next Wednesday – highlights its concern over UK economic situation and outlook,” says Howard Archer, chief economic advisor to the EY ITEM Club.

“It is also concerned over the recent marked rise in UK gilt yields amid tightening financial conditions and the plan to buy £200bn more of gilts and corporate bonds is clearly aimed at tackling this.”

The central bank said a severe economic shock is expected in light of the coronavirus epidemic.

“Over recent days, and in common with a number of other advanced economy bond markets, conditions in the UK gilt market have deteriorated as investors have sought shorter-dated instruments that are closer substitutes for highly liquid central bank reserves. As a consequence, UK and global financial conditions have tightened,” it said in a statement.

At a special meeting held on March 19, the Monetary Policy Committee voted to cut the base rate down to 0.1 percent while increasing holdings of UK government and corporate bonds by £200bn.

This comes after the rate was cut to 0.25 percent on March 11, the day the chancellor presented the country’s budget – which focused on containing Covid-19.

The central bank also announced it will revive quantitative easing by buying a further £200bn of government and corporate bonds, reaching £645bn.

Further, the Bank of England will enlarge its Term Funding Scheme (TFS) with incentives for SMEs.

It’s next MPC meeting is set to take place on March 25.

While further measures are likely to be announced in the upcoming meeting, EY highlights interest rates will unlikely be cut any lower than 0.10 percent.

The Bank of England and Prudential Regulation Authority will announce today several additional measures directed at mitigating burdens on PRA-regulated firms and Bank-regulated financial market infrastructures.

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