4th August 2016
Experts have given their views on the Bank of England’s rate cut, QE and support fore banks.
Bank of England goes further than expected
Ben Brettell, Senior Economist, Hargreaves Lansdown
“Recent survey data has been so bad that anything other than a rate cut today would have disappointed markets. Expectations had also grown that a package of measures would be announced in addition to a 25bps cut in base rate.
“In the event the Bank went further than markets anticipated, and as a result sterling immediately fell by more than a cent and a half against both the dollar and the euro. The FTSE 100 jumped almost 100 points, or 1.5%. Even if you accept the economy is going to get sick, I would question whether lower interest rates and more QE are the right medicine.
“The Term Funding Scheme will mean that banks aren’t reliant on savers’ cash, so I expect savings rates will be slashed. Yet savers have already accepted their cash is generating next to nothing – a cut in interest won’t mean they suddenly rush out and spend it instead. Likewise borrowing is already cheap – slightly lower rates will do little to encourage companies to take on more debt. It’s economic uncertainty, not the cost of financing, which is putting businesses off investing at present.
“QE is designed to bring gilt yields down, and to flatten the yield curve. However a look at current gilt yields tells you they are already extraordinarily low – what is the benefit of bringing them down further?
“Mark Carney has rightly pointed out that monetary policy can only do so much. This lays the gauntlet down for the chancellor to apply some fiscal stimulus when it comes to this year’s Autumn Statement. Gilt yields are so low that the government can borrow at next to nothing, which could pave the way for investment in infrastructure projects like an extra runway at Heathrow.”
Worst time to retire
Steven Cameron, Pensions Director at Aegon
“The further cut in interest rates means now is probably the worst time ever to be making a retirement decision, with those buying an annuity today locking in to super-low returns for life.
“After 7 years of low rates, there’s no guarantee we’ll see any significant improvement in interest rates or annuity terms in the short term. But those not ready to make a ‘once in a lifetime’ decision could consider deferring their retirement date or alternatively keeping their pension fund invested and drawing a retirement income direct from their fund.”
Bad news for investors reliant on cash
Richard Stone, Chief Executive at The Share Centre
“This move by the BoE represents the unleashing of the last remaining monetary policy tools available. For investors this is not good news. In a recent survey of 2000 personal investors carried out by The Share Centre*, investors expressed concern at further interest rate cuts and clearly wanted a loosening of fiscal policy in preference to a further loosening of monetary policy.
“51% of personal investors said they were worried by the prospect of further interest rate cuts, which is unsurprising given that 8% of personal investors said they were using cash as the main investment vehicle for driving an income from their savings. When given a choice of policy instruments – reducing corporate taxes, reducing personal taxes, more quantitative easing or lower interest rates – reducing interest rates was ranked as the least popular (16%).
“Faced with a lower base rate, likely translating into lower deposit rates, investors are inevitably going have to accept more capital risk in an attempt to maintain or enhance income. This was again evident in The Share Centre’s survey with 17% of personal investors saying a cut in interest rates would make them more likely to invest in risk assets such as equities, bonds or property, and 36% saying they were more likely to transfer cash ISA holdings into a portfolio of risk assets.”
UK financial services not best placed to weather negative rates
Dean Turner, Economist at UBS Wealth Management
“Though not as sizeable as some expected, today’s cut represents the prudent stewardship we have come to expect of Mark Carney’s Bank of England. As anticipated, sterling’s post-Brexit slide has pushed up the inflation profile and the inflation target will now be breached. But it’s the much weaker outlook for growth, with the prominent possibility of a recession that will have spurred the Bank into taking action today.
“If the economy continues to deteriorate, the Bank have signalled they are ready to lower rates further and provide additional QE, though rates are unlikely to stray into negative territory with Carney at the helm. The UK’s financial services-dominated economy isn’t best placed to weather negative rates.
“Where next for monetary policy is dependent on the political picture as well as how the economy unfolds. We expect a meaningful fiscal response in the Autumn, as signalled by the Chancellor, which could give the Bank greater flexibility.”
Rubbing salt in the wounds for savers
Andy Cumming, Head of Advice Close Brothers Asset Management
“An interest rate cut rubs salt in the wound for savers, who have already faced seven years of rock bottom returns on cash savings. They now have to contend with even lower rates, and increasing inflation eating away at their savings. For those looking to set aside money for the long-term, investment options will become more appealing by contrast.
“The benign rate environment also has the negative effect for those approaching retirement and considering an annuity. With lower rates, and reduced yields on government debt, fixed annuities could suffer for those securing a product. With annuity pay-outs already falling following the landmark Brexit vote, this retirement income option could become even less popular.
“On the positive side however, those saddled with mortgage debt may find rates become even cheaper. Already at or near historic lows, those on tracker rates or on the cusp of remortgaging should see their monthly costs diminish, offsetting some of the damage to savings rates.”
Will cut really make a difference?
Russ Mould, investment director at AJ Bell
“Markets have been pricing in a loosening of monetary policy ever since the Brexit vote so today’s move by the Bank of England is likely to be welcomed by equity investors but is bad news for people with cash savings.
“There is a big question mark over whether the rate cut will truly make any difference to the economy. Headline borrowing costs have stood at record lows for more than seven years, yet economic growth has remained sluggish. It is debateable whether lenders will reduce their variable rate mortgages but highly likely that savings rates will be slashed further.
“There is already a desperate hunt for income and a further reduction in bank savings rates will do nothing to help this. So the outcome may be that we see no pick-up in economic growth with people looking for an alternative home for their savings rather than spending more.
“History shows that interest rate cuts can boost stock prices with markets having jumped over 8% in the six months following previous cuts in interest rates since 1970.
“Overall, stock markets may welcome today’s move in the short-term, with sterling a possible sacrificial lamb but as always there will be winners and losers.”