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First UK rate cut since 2009 – CIO Summary

04 August 2016

Jonathan Marriott - Chief Investment Officer

The Monetary Policy Committee (MPC) of the Bank of England met today. From this meeting, they have announced a package of measures which are intended to boost the economy after the vote for Brexit in June. This was then followed by the release of the Bank of England Quarterly inflation report and a press conference at which the Governor Mark Carney was questioned about the MPC actions and expectations.

Base Rate: They have cut Base Rate by 0.25% to 0.25% and indicated that a majority of MPC members thought they could cut further at a forthcoming meeting to “close to, but a little above, zero”. The Governor has warned about the impact of negative rates and ruled them out in the press conference. They are concerned that rate cuts are not easily passed on by banks to customers. To ease the pass through of lower rates they are introducing a Term Funding Scheme (TFS) which could reach £100billion.

Quantitative Easing (QE): They are increasing Gilt purchases by £60 billion over the next six months. They also announced up to £10 billion in investment grade secondary market corporate bond purchases over eighteen months. The decision on Gilt purchases was split 6-3 in favour but there was stronger support (8-1) for the corporate bonds. This split in voting reflects some doubts about how reliable an indicator of the future economy is from the survey data available at this time. The corporate bonds will exclude Financials but they have not set any specific maturity or yield target for these purchases.

Economic expectations: They now expect inflation to rise above target to 2.4% in 2017/18. The charts for GDP growth expectations in the inflation report show a wide range of possible outcomes with the central growth forecast in 2017 down to 0.8% versus 2.3% in the last quarterly report.

Market reaction (at the time of writing): FTSE 100 is up 1.2%. Gilt yields fell to 0.69% from 0.8% before the meeting. Sterling has fallen about 1.1%. Ten year Index linked gilts have moved to price additional inflation in the short term outperforming conventional gilts.


The package of lower Base, more QE and the new TFS appears to have been well received by markets. They have indicated that they are prepared to increase all these actions if necessary in future. Markets indicate that the base rate could fall again next year, after the end of the additional government bond QE. They appear to be tolerating a risk of higher inflation rate short term to preserve economic growth.