If you’re a saver, look away now. The Bank of England has just cut the UK’s key interest rate to 0.1%. OK, you’re probably not losing much more of the vast amount of interest you are not currently being paid on your savings.
Earlier this morning, the Bank’s key rate was only at 0.25%. So this part of the Bank’s latest emergency aid package was just “the showbiz”. The showbiz is an important part of being a central banker. Central banking is as much about communicating intent as acting.
Cutting the base rate to 0.1% from 0.25% does very little in practical terms. But as a statement of intent, it’s pretty clear. You’re making it obvious that you really will do “whatever it takes”. Thing is, you need to back the showbiz up with some genuine action. And the Bank has most definitely done that.
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Until now, the Bank of England was maintaining quantitative easing (ie, buying bonds with printed money) at an overall level of £445bn. It hasn’t been increasing the size of its balance sheet, but it hadn’t been shrinking it either. So when old bonds mature, it had been rolling them over (ie, buying fresh ones to replace them).
But now it’s going to be ploughing even more money into the market. The Bank will now print an extra £200bn, increasing the size of its balance sheet to £645bn. With that added money it will buy sterling-denominated investment grade corporate bonds, and government bonds.
What’ll that do? It gives the UK some breathing space. As we discussed in Money Morning this morning, monetary conditions around the world have been tightening because of a desperate demand for dollars. This move takes any pressure off at this end.
And interestingly, currency markets don’t seem to mind – normally you’d expect this sort of action to hit the strength of the pound, but in fact the pound has rallied somewhat.
In all, it’s clear that the Bank and the government are as one on this. They really will do whatever it takes. We may well have to deal with the fall-out from that after this crisis is over but we can expect a lot more action in the days and weeks ahead.
Here’s tomorrow’s magazine cover by the way…
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