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What should investors make of the actions taken by the Bank of England and the Chancellor today?

11 March 2020

The widespread impact of COVID-19 has caused the UK government and Bank of England, as well central banks globally to take action in reaction to the associated turmoil.

The government and the Bank of England (BoE) have taken significant coordinated action to try and see off the worst economic impact of the COVID-19 Coronavirus. They are both ready to take further action if needed.  

Firstly, the BoE cut base rates by 50bp to 0.25%. They also made a technical adjustment to the counter cyclical buffer that could unlock as much as £190 billion of bank lending. In addition, a new term funding scheme for small and medium size enterprises (TFSME) was unveiled that may unlock another £100 billion of lending to businesses that are likely to be the most affected by the disruption of COVID-19.  

Secondly, Rishi Sunak, in his first Budget as Chancellor, announced a fiscal stimulus of £30 billion pounds in "temporary, timely and targeted" aid. He said we needed to be prepared for up to 20% of the workforce to be off at the same time. He has taken action to help people who are off sick or self-isolating with sick pay and has temporarily removed business rates for many small businesses. Sunak is taking measures to ensure that these businesses survive any slowdown down caused by the Coronavirus and, in order to prevent its further spread, he has said the BoE would do whatever it takes to keep the economy strong. Equally, the NHS would have whatever it takes to cope with the Coronavirus. The government and the BoE stand ready to take further action.

From an investment market perspective, these events have had little impact. We need to see similar action from the US authorities. The Federal Reserve (Fed) cut rates 0.50% last week and a further rate cut is expected. On Tuesday, the US equity index market gyrated in a 5% range as rumours came and went about proposals for tax cuts and other measures from President Trump. The S&P 500 Index ended nearly 5% up, but is down 3% today. There is a meeting at the White House this morning to discuss the situation and we hope to see some action from that. So far, Trump's attempt to get a permanent payroll tax cut has been rejected and the Democrats are looking for a more targeted approach. With Congress planning to be in recess next week, getting a temporary, timely and targeted package, as Rishi Sunak put it, may be much harder in the US.

Elsewhere, the Australian Government is expected to announce a fiscal stimulus package on Thursday, the European Central Bank (ECB) is also scheduled to meet then, and we should expect them to be adding further stimulus to the European economy. ECB President, Christine Lagarde, has indicated that they are ready to act but called on European leaders to take coordinated action. 

The G-7 Finance ministers and central bankers met last week and when the Fed cut rates there was disappointment that there was not further coordinated action. This week we are seeing action from many governments and central banks. They may not all be co-ordinated but are working towards the same goal of ensuring that when we come out of this present crisis, the economy will be well placed to recover. As ever, action from the US will be key to the global economic outlook.

When we come out of this, we expect central banks will be slow to take back the rate cuts. As growth recovers, equity markets will look cheap relative to bonds.  At present, many investors are focussing on the short-term fears rather than the longer-term opportunities in the equity market. For the time being, we may continue to see big swings in both directions but would encourage investors to look through these short-term moves.

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