“What a shock,” says Alistair Osborne in The Times. Bank of England Governor Mark Carney actually did something he said he was going to do. Having noted last month that the Bank’s Monetary Policy Committee (MPC) expected monetary policy to be loosened in August, he duly delivered the first interest-rate cut in seven years. The base rate fell from 0.5% to 0.25%, a new record low.
He also restarted quantitative easing (QE) – buying bonds with newly created money. The Bank will purchase another £60bn worth over the next six months, and extend the programme to £10bn of corporate bonds. There was also a “term funding scheme” worth up to £100bn to offer banks cheap loans to ensure they pass on the cut in interest rates. Throw in the government’s hint that it could loosen fiscal policy, says Bank of America Merrill Lynch, and the package amounted to “the kitchen sink and a bit of next door’s sink too”. The markets liked it: sterling fell, the yield on the ten-year gilt fell to another record low under 0.65%, and equities bounced.
Yet for all the sound and fury, this signifies practically nothing. Cutting interest rates by a quarter point is hardly going to make much difference when the previous rate was already almost at rock bottom. Only 30% of us have mortgages now, compared with 40% a decade ago, notes Pantheon Macroeconomics, while half of borrowers have fixed-rate mortgages, so overall debt interest payments won’t fall much.
Similarly, one of the main ideas behind QE is to reduce the yields on corporate and state debt, thus reducing long-term borrowing costs. “But government bond yields are on the floor already,” says former MPC member Andrew Sentance in The Daily Telegraph. So this move can hardly “change the dials” for the performance of the economy. Indeed, all this frantic yet ineffectual activity could undermine confidence, as it makes the Bank look so worried about the post-Brexit economy. We will only start getting official data later in the summer, so Carney’s move could end up looking premature.
More broadly, we have long reached the point where the side effects of lowering bond yields and injecting liquidity into asset markets outweigh any good it might have done. “For the asset poor… or pensioners, or insurance companies, or pension funds, the Bank of England has morphed from anti-inflationary fireman to monetary arsonist”, says MoneyWeek contributor Tim Price of PFP Wealth Management. But “for the asset-rich, for the 1%, for property speculators… Carney is your man”.