All You Need To Know About Bank Of England’s Rate Cut And Quantitative Easing Measures

  • March 20, 2020 01:07 AM GMT
  • Team Kalkine
All You Need To Know About Bank Of England’s Rate Cut And Quantitative Easing Measures

Just a week after the Bank of England’s (BoE) Monetary Policy Committee decided to cut down the interest rate from 0.75 per cent to 0.25 per cent, to address the coronavirus outbreak, the BOE’s Monetary Policy Committee again met on Thursday, 19th March 2020, to announce that they have cut down the interest even further to a record low of 0.1 per cent. This was a historic decision, as even during the crisis of the two world wars, the bank rates were never declared to be this low. This unprecedented decision has been taken by the MPC to stimulate borrowing and spending in the economy, so that the ailing industries in the United Kingdom, have a chance of survival, as and when the Covid-19 outbreak is contained and the situation gets back to normal.

Along with the slashing of the interest rates to a historic low, the Bank of England also announced quantitative easing measures worth £200 billion, taking the total measures to a value of approximately £645 billion. This came just days after Rishi Sunak’s announcement of an economic stimulus package worth £350 billion on behalf of the Exchequer. This package was aimed at guaranteeing a massive increase in government spending as well as loan guarantees on the part of the government, that’ll allow companies to operate on a day to day basis and make payments to their employees as well as to their suppliers.

In another major proposal, a day before the BoE’s announcement for a rate cut and quantitative easing, it was reported that the prime minister Boris Johnson would announce a Cash for All scheme, following on the footpaths of the United States of America’s similar scheme to give a cheque of US $1000 to all American citizens. Economists and various other financial experts lauded these schemes but wanted some quantitative easing on both economic and health front from the Bank of England to support the industries and the financial system of the country, as a response to which, the decision of slashing the bank rate was taken.

(Data Source: Bank of England Website)

The Bank slashed the bank rate to a record low and at the same time, announced its decision to expand the quantitative easing stimulus package. This decision was taken, due to a sudden worsening of the sentiment towards the financial markets, as both the investors and the consumers doubted that the new administration was not very serious towards the handling of the pandemic, and believed that all parties involved could do much more as compared to the present moment, so that the economy could be saved from a financial crisis looming large. Another important decision that the Bank of England announced was regarding a discussion held during the special meeting of the monetary policy committee. It would be looking to purchase an additional amount of approximately £200 billion of debt in the form of UK government and corporate bonds as a part of the Quantitative Easing money-printing scheme, which has been thought of as well as designed for the purpose of preservation of the current cash flows of the economy as well as pumping of more money into the system, as and when required.

How did the markets react to the BoE decision?

The outlook of this decision, from the investor’s perspective, looks to be positive. This is reflected in the performance of the stock markets, not just in the United Kingdom, but also globally. At the time of the closing of markets, on 19th March 2020, it was reported that the FTSE 100 index (UK Benchmark Index) of the London Stock Exchange closed up by around 1.4 per cent or 71 points as compared to the previous day at 5,152 points, while Germany’s benchmark stock index, the DAX closed at an increase of around 2 per cent at 8,610 points. Other European stock exchanges followed suit, led by France’s CAC Index, which was up by around 2.7 per cent, closing at 3,855 points. The biggest surprise came from the Italian Benchmark FTSE MiB, which, after days of negative returns, closed on a positive note, at an increase of 2.3 per cent and closed at 15,467 points. Europe’s Stoxx 600, which tracks the 600 biggest stocks in the EU Block, also surged as it closed at 288 points, an increase of 2.9 per cent in its value as compared to the previous day.

This also impacted the US based stocks and the wall street, as similar measures from the United States Federal Reserve and the US Administration led to an across the board increase in stock prices with Dow Composite Index moving up by 188 points or almost 0.95 per cent and, closing at 20,088 points and the S&P 500 Index was also up by 11.2 points or 0.47 per cent at 2,409 points.

The euphoria is still continuing and at the time of writing, at 09:15 A.M GMT, on 20th March 2020, the FTSE 100 Index was reportedly trading at 5,264 points, an increase of 2.14 per cent or 112.84 points as compared to the closing value on the previous day, while the FTSE 250 Index was up by 5.36 per cent or 687.66 points, at 13,517.36 points. Both major Indices of the United Kingdom were displaying optimism from the investors as both were staring at the second consecutive session of gains, after a long period of time, in the midst of this crisis. It is widely suggested that this is the positive impact of the action from the UK’s Government as well as the Monetary bodies in a bid to fight the economic damage inflicted by Covid-19 pandemic.

Other highlights from Bank of England’s meeting

In a bid to fight the coronavirus outbreak and to revive the British economy, the Bank of England, its Monetary Policy Committee as well as Her Majesty’s Treasury department have been consistently meeting to look for solutions that could contribute to the revival of the economy. Here are some highlights from these meetings and the statements made by the Bank of England in the last few days.

  • It was reported that the MPC would set up a Covid Corporate Financing Facility (CCFF), which will primarily engage in the provision of financing to companies operating in the United Kingdom, by purchasing commercial paper of maturity date of up to one year. They would be issued by firms that are making a tangible and material contribution towards supporting the government and the communities during this period of crisis. This will be done to support the businesses who are under immense financial distress and are facing a cash crunch to pay daily wages and manage their day to day operations.
  • It has also been reported that the facility would offer to fund to those who have been hit hard by the covid-19. Though, this is considered to be a complicated and a subjective process, as the BoE would look at the prevailing conditions in markets during the period before the Covid-19 pandemic started taking over the customers and will be open to firms that can showcase that they had great operational and financial performance just prior to the outbreak.
  • In another meeting, conducted on 19th March 2020, it was announced that the BoE would expand the Term Funding Scheme for small and medium enterprises (TFSME). It was also highlighted that under this a large proportion of further asset acquisitions would be done out of the UK government bonds.
  • The next meeting of the Monetary Policy Committee is expected to be held on 25th March, which could entail further measures taken by the MPC and the BoE to understand and react on the economic impact of Covid-19 Pandemic.

 

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