The Bank of England (BoE) last Friday announced that it had cut rates to 0.25% – a new low in the Bank’s 322 year history.
The move was well-flagged and fully expected by markets, despite the Bank forecasting inflation to breach its target as currency weakness is passed on to households in the form of price rises. The rate cut will hurts savers, but may help banks provide loans more cheaply to firms wanting to invest – so supporting employment – and could also ease the burden on indebted households. Of greater interest to markets has been the expansion of quantitative easing (including corporate bonds), which has sent long dated gilt yields lower, and the Term Funding Scheme.
Ahead of the announcement a number of Monetary Policy Committee (MPC) members had indicated that they would be keeping in mind the impact of any move by the Bank of England on pensions, insurance and banks in order to prevent an intended loosening of policy actually tightening it. The Term Funding Scheme appears designed to offset the squeeze on commercial banks that a cut in rates delivers. That the MPC assessed the impact on pension funds of further yield declines as being relatively limited looks courageous. Their assessment that the overall size of contributions to defined benefit pension schemes have been stable over twenty years despite fluctuations in the size of their deficits deserves further scrutiny.
While the cut to BoE growth forecasts for 2017, from 2.3% to 0.8%, appears meaningful, the projection itself remains above our expectations of 0.5%. More striking perhaps are the revisions to investment forecasts: business investment in 2016 is seen at -3.75% vs May’s Quarterly Inflation Report at +2.5%; 2017’s is hammered down to -2% from +7.25%.
By, Toby Nangle, Head of Multi-Asset Allocation, EMEA at Columbia Threadneedle Investments
