BOE cut its bank rate to 0.25 percent, its first rate cut since August 2016, in the wake of the vote to leave the European Union (EU), and its first change in interest rates since August 2018.
The rate cut by the U.K. central bank was unscheduled, just as that of the U.S. Federal Reserve, on March 3, boosting the number of central banks that have cut rates in the wake of the outbreak of the coronavirus, or COVID-19, to 26.
The list of central banks around the world that have eased their policy in response to the damage from the coronavirus has been rising steadily since late January and includes not only the BOE and the Fed, but also the central banks from Canada, Australia, China, Russia, Mexico, Turkey, Indonesia, Malaysia, the Philippines and the Indian Ocean island of Mauritius.
"Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months," the BOE said, as supply chains are disrupted temporarily and weaker activity may challenge cash flows and increase demand for short-term credit from households and for working capital from companies, especially smaller businesses.
While the BOE said it expects the rate cut to support business and consumer confidence at a difficult time, the BOE acknowledged rates were now so low that it would be difficult for some banks and building societies to lower rates even further.
In order to maximize the effectiveness of its rate cut, the BOE not only launched a new Term Funding scheme with additional incentives for small and medium-sized enterprises but also slashed the countercyclical capital buffer for banks to 0 percent of their exposure to UK borrowers with immediate effect.
"When interest rates are low, it is likely to be difficult to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance," BOE said.
The funding scheme, which echoes a scheme from 2016, will over the next 12 months offer 4-year funds at lending rates that are at, or very close, to the bank rate, and additional funding will be available to banks that boost lending to small and medium-sized businesses.
Based on BOE's experience with the 2016 scheme, it estimated the new scheme could provide in excess of 100 billion pounds in funds, helping reinforce the transmission of the bank's rate cut to the real economy and ensure businesses and households benefit.
Global banking regulators devised the countercyclical buffer in the wake of the global financial crises to protect banks against major losses from systemic risks. During good economic times, the buffer is raised so banks can bolster their capital base while it is then lowered when the financial cycle worsens.
The countercyclical buffer in the UK was at 1.0 percent and scheduled to rise to 2.0 percent by December 2020 but the BOE's Financial Policy Committee (FPC) cut the rate to 0 percent for at least 12 months so any increase would not take effect until March 2022, at the earliest.
This cut should support up to 190 billion pounds of bank lending, or 13 times banks' lending to businesses in 2019, BOE said, adding this means banks won't face any obstacles to supplying credit to businesses and households.
"Given the resilience of the core banking system, businesses and households should be able to rely on banks to meet their need for credit to bridge through a period of economic disruption," BOE said.
BOE's banking regulators, in the form of the Prudential Regulation Committee (PRC), added that "banks should not increase dividends or other distributions, such as bonuses, in response to these policy actions."
The policy measures were agreed by a special meeting on March 10 by BOE's three policy committees: The Monetary Policy Committee (MPC), the Financial Policy Committee (FPC) and the Prudential Regulation Committee (PRC)
The outcome of the next regularly scheduled MPC meeting is on March 26.
"The Bank’s three policy committees are today announcing a comprehensive and timely package of measures to help UK businesses and households bridge across the economic disruption that is likely to be associated with Covid-19
The front line of combatting the challenges of Covid-19 comprises the extraordinary efforts of NHS health professionals, carers, and volunteers across the country, as well as the exceptional support by the FCO to UK citizens abroad.
The Bank of England’s role is to help UK businesses and households manage through an economic shock that could prove sharp and large, but should be temporary. The Bank’s three policy committees are today announcing a comprehensive and timely package of measures to help UK businesses and households bridge across the economic disruption that is likely to be associated with Covid-19. These measures will help to keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm.
Following the spread of Covid-19, risky asset and commodity prices have fallen sharply, and government bond yields reached all-time lows, consistent with a marked deterioration in risk appetite and in the outlooks for global and UK growth. Indicators of financial market uncertainty have reached extreme levels.
Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months. Temporary, but significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for short-term credit from households and for working capital from companies. Such issues are likely to be most acute for smaller businesses. This economic shock will affect both demand and supply in the economy.
MPC reduces Bank Rate and launches new Term Funding Scheme with additional incentives for SMEs
At its special meeting ending on 10 March 2020, the Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25%. The MPC voted unanimously for the Bank of England to introduce a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves. The MPC voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.
The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.
When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates. In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs). Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.
The TFSME will:
help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses and households benefit from the MPC’s actions;
provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets;
incentivise banks to provide credit to businesses and households to bridge through a period of economic disruption; and
The Bank of England’s role is to help UK businesses and households manage through an economic shock that could prove sharp and large, but should be temporary. The Bank’s three policy committees are today announcing a comprehensive and timely package of measures to help UK businesses and households bridge across the economic disruption that is likely to be associated with Covid-19. These measures will help to keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm.
Following the spread of Covid-19, risky asset and commodity prices have fallen sharply, and government bond yields reached all-time lows, consistent with a marked deterioration in risk appetite and in the outlooks for global and UK growth. Indicators of financial market uncertainty have reached extreme levels.
Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months. Temporary, but significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for short-term credit from households and for working capital from companies. Such issues are likely to be most acute for smaller businesses. This economic shock will affect both demand and supply in the economy.
MPC reduces Bank Rate and launches new Term Funding Scheme with additional incentives for SMEs
At its special meeting ending on 10 March 2020, the Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25%. The MPC voted unanimously for the Bank of England to introduce a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves. The MPC voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.
The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.
When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates. In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs). Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.
The TFSME will:
help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses and households benefit from the MPC’s actions;
provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets;
incentivise banks to provide credit to businesses and households to bridge through a period of economic disruption; and
provide additional incentives for banks to support lending to SMEs that typically bear the brunt of contractions in the supply of credit during periods of heightened risk aversion and economic downturns.
FPC releases the UK Countercyclical Capital Buffer
To support further the ability of banks to supply the credit needed to bridge a potentially challenging period, the Financial Policy Committee (FPC) has reduced the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect. The rate had been 1% and had been due to reach 2% by December 2020.
The FPC expects to maintain the 0% rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest.
Although the disruption arising from Covid-19 could be sharp and large, it should be temporary. Such economic disruption should have less of an impact on the core banking system than recent stress tests run by the Bank have shown the system can withstand. Those stress tests demonstrated that banks would be able to continue to lend to businesses and households even while absorbing the effects of substantial, prolonged economic downturns in both the UK and the global economies, as well as falls in asset prices much larger than experienced in recent weeks.
Given the resilience of the core banking system, businesses and households should be able to rely on banks to meet their need for credit to bridge through a period of economic disruption.
The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019. Together with the TFSME, this means that banks should not face obstacles to supplying credit to the UK economy and to meeting the needs of businesses and households through temporary disruption.
The FPC and the Prudential Regulation Committee (PRC) will monitor closely the response of banks to these measures as well as the credit conditions faced by UK businesses and households more generally.
PRC issues Supervisory Guidance
The release of the countercyclical capital buffer reinforces the expectations of the FPC and the PRC that all elements of banks’ capital and liquidity buffers can be drawn down as necessary to support the economy through this temporary shock. In addition, the Prudential Regulation Authority (PRA) has today set out its supervisory expectation that banks should not increase dividends or other distributions, such as bonuses, in response to these policy actions.
Major UK banks are well able to withstand severe market disruption. They hold £1 trillion of high-quality liquid assets, enabling them to meet their maturing obligations for many months.
In response to the material fall in government bond yields in recent weeks, the PRC invites requests from insurance companies to use the flexibility in Solvency II regulations to recalculate the transitional measures that smooth the impact of market movements. This will support market functioning.
--- --- ---
The Bank of England has operations in place to make loans to banks in all major currencies on a weekly basis. Banks have pre-positioned collateral with the Bank of England enabling them to borrow around £300 billion through these facilities.
The Bank is coordinating its actions with those of HM Treasury in order to ensure that our initiatives are complementary and that they will, collectively, have maximum impact, consistent with our independent responsibilities. The Bank continues to co-ordinate closely with international counterparts.
FPC releases the UK Countercyclical Capital Buffer
To support further the ability of banks to supply the credit needed to bridge a potentially challenging period, the Financial Policy Committee (FPC) has reduced the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect. The rate had been 1% and had been due to reach 2% by December 2020.
The FPC expects to maintain the 0% rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest.
Although the disruption arising from Covid-19 could be sharp and large, it should be temporary. Such economic disruption should have less of an impact on the core banking system than recent stress tests run by the Bank have shown the system can withstand. Those stress tests demonstrated that banks would be able to continue to lend to businesses and households even while absorbing the effects of substantial, prolonged economic downturns in both the UK and the global economies, as well as falls in asset prices much larger than experienced in recent weeks.
Given the resilience of the core banking system, businesses and households should be able to rely on banks to meet their need for credit to bridge through a period of economic disruption.
The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019. Together with the TFSME, this means that banks should not face obstacles to supplying credit to the UK economy and to meeting the needs of businesses and households through temporary disruption.
The FPC and the Prudential Regulation Committee (PRC) will monitor closely the response of banks to these measures as well as the credit conditions faced by UK businesses and households more generally.
PRC issues Supervisory Guidance
The release of the countercyclical capital buffer reinforces the expectations of the FPC and the PRC that all elements of banks’ capital and liquidity buffers can be drawn down as necessary to support the economy through this temporary shock. In addition, the Prudential Regulation Authority (PRA) has today set out its supervisory expectation that banks should not increase dividends or other distributions, such as bonuses, in response to these policy actions.
Major UK banks are well able to withstand severe market disruption. They hold £1 trillion of high-quality liquid assets, enabling them to meet their maturing obligations for many months.
In response to the material fall in government bond yields in recent weeks, the PRC invites requests from insurance companies to use the flexibility in Solvency II regulations to recalculate the transitional measures that smooth the impact of market movements. This will support market functioning.
--- --- ---
The Bank of England has operations in place to make loans to banks in all major currencies on a weekly basis. Banks have pre-positioned collateral with the Bank of England enabling them to borrow around £300 billion through these facilities.
The Bank is coordinating its actions with those of HM Treasury in order to ensure that our initiatives are complementary and that they will, collectively, have maximum impact, consistent with our independent responsibilities. The Bank continues to co-ordinate closely with international counterparts.
The actions announced today by the three policy committees of the Bank of England comprise a comprehensive and timely package to allow UK businesses and households to bridge a temporarily difficult period and thereby to mitigate any longer-lasting effects of Covid-19 on jobs, growth and the UK economy.
The Bank will take all further necessary steps to support the UK economy and financial system, consistent with its statutory responsibilities.
The minutes of the special MPC meeting ending on 10 March will be published at 12 noon on 13 March 2020. The next regularly scheduled MPC meeting will end on 25 March 2020, with the minutes of that meeting published on 26 March. The record of the FPC meeting ending on 9 March and the next regularly scheduled meeting on 19 March will be published together at 9.30 am on 24 March 2020."
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The Bank will take all further necessary steps to support the UK economy and financial system, consistent with its statutory responsibilities.
The minutes of the special MPC meeting ending on 10 March will be published at 12 noon on 13 March 2020. The next regularly scheduled MPC meeting will end on 25 March 2020, with the minutes of that meeting published on 26 March. The record of the FPC meeting ending on 9 March and the next regularly scheduled meeting on 19 March will be published together at 9.30 am on 24 March 2020."
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