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Investors welcome Bank of England stimulus measures

Investors welcome Bank of England stimulus measures

04-08-2016 | Insight

The Bank of England’s rate cut and new QE stimulus measures is a positive package that will be welcomed by investors, says Robeco’s Lukas Daalder.

  • Lukas Daalder
    Lukas
    Daalder
    Chief Investment Officer

Speed read

  • UK central bank cuts base rate to 0.25% in first reduction since 2009
  • Bank launches GBP 70 billion of new QE including corporate bonds
  • Pound and Gilt yields fall as stocks rise on ‘positive package’ for UK

The Bank cut its main lending rate from 0.5% to a new low of 0.25% and announced a higher-than-expected new GBP 70 billion QE package of economic stimulus measures, including the intention to buy GBP 10 billion of corporate bonds. It is the first time the Bank has cut the base rate since March 2009, and the first time QE has been used to stimulate the economy since 2012.

As part of further attempts to promote growth, the central bank also announced a package of GBP 100 billion of ‘term funding’ that would be made available to high street banks to lend out to small businesses or individuals.

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Positive surprises

“So they now have three measures – the rate cut, the QE package and the term funding,” says Daalder, Chief Investment Officer of Robeco Investment Solutions. “The real surprise was in the QE package, where half of analysts had expected nothing, and the other half had expected GBP 25-50 billion.”

“Extending it to include corporate bonds was also a positive surprise, and it’s an all-British affair, as only those companies which are seen making a big contribution to the UK economy will be included. So it’s a more aggressive package of stimulus measures which the market quite liked.”

The pound weakened by 1% against the euro and the yield on the 10-year UK Gilt fell 14 basis points to a new all-time low of 65 basis points, in line with the lower interest rate. UK stocks welcomed the news, with the FTSE 100 Index rising 1% following the announcement.

“I’m not a big fan of lowering interest rates to use as stimulus, but it’s a logical step, and the Bank also indicated that the lower bound is slightly above zero,” says Daalder. “This means they are basically saying they won’t lower rates below zero and create negative rates, which is also sensible.”

“All in all, it’s positive for the UK, and for investors. The Bank has managed to do what it should have done, and with monetary policy, half of what you do is sentiment. You win half the battle by winning over investors, and that’s what they have managed to do with this.”

Brexit stuns world

The measures follow the historic Brexit vote on 23 June, in which Britons stunned the world by voting to leave the European Union, against all expectations from prior opinion polls. It led to the resignation of Prime Minister David Cameron and the appointment of Theresa May as the country’s new leader in July.

May has said she will not trigger Article 50, the legal mechanism by which the UK begins the divorce from the EU, until at least 2017 due to fears over growth prospects if the UK leaves the Single Market. This was borne out in projections by the Bank of England, which cut its growth forecast for GDP in 2017 to 0.8% from 2.3%.

Daalder cautioned that while the Bank of England’s measures were welcome, the UK still faces a bumpy road to accommodate the Brexit. “Although we feel this is a positive step forward for the UK, we still expect the UK economy to be negatively impacted by the existing uncertainty,” he warns. “The financial markets have not fully discounted this bad news, which we expect to lead to volatility moving forward.” 

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