Tony Ward is chief executive of Clayton Euro Risk
So now we have the historical rate cut to Bank Rate taking it down to 0.25%. I have been suggesting that this was something that should be avoided as having little real impact on its own and arguably little of this would be passed on to borrowers in any event without a more innovative suite of solutions.
Well now we have the cut and very little is left in the tank as it were to be able to pass on in the future.
Realistically only one more cut is left. The Bank of England have apparently ruled out negative interest rates and I have to say, based on the experience of other countries with Negative Interest Rate Polices (NIRP) there is little to show that they have any real impact in stimulating economies. More than anything what we need is confidence. If the UK economy is slowing up when in fact nothing has changed at this point other than a vote in a referendum, this shows that it is the fear of the unknown which is causing the slowdown. The appointment of Theresa May so swiftly will have had a positive effect but of course there is always a lag in data. I hope that the MPC took this lag into effect when they made their decision.
Mark Carney (pictured) has made it clear that he expects banks to pass on the rate cut to borrowers and some have already come out positively to confirm that.
But it is also clear that the Bank of England recognises that with margins squeezed so heavily right now it is going to be difficult.
The two major issues facing lenders right now are accessing enough funding to maintain liquidity and therefore lending volumes, and margins. Of these two, liquidity and funding are the most crucial. Even before last week’s rate cut lenders were having to access far more of their funding from retail deposits and this has put stresses on margins where lenders are having to pay a premium to maintain their liquidity. This is because the wholesale funding markets are providing very little reassurance right now with a significant reduction in investors looking to invest and adverse capital treatment emanating from the EU for Life and Pension funds in investing in securitised mortgages rather than, for example, covered bonds. This will only make things worse in the short term. Clearly the Bank understands this and has launched a number of initiatives alongside the rate cut which are to be welcomed.
These include a reactivation of QE (which the pensions industry won’t be happy about) and the new Term Funding Scheme (TFS), which is a rehash of the Funding For Lending Scheme (FLS) launched in 2012. In essence the TFS is FLS on speed given it has lower costs associated with it and is therefore designed to make liquidity available to qualifying banks and building societies at a cost of Bank Rate (i.e. Base Rate) with incentives to grow lending. So good news then? Well not entirely.
This scheme is available to banks and building societies who are eligible to participate in the Sterling Monetary Framework. Most but not all. And it won’t help the non-bank sector at all. One of the side effects of the FLS was that it held back the reactivation of the securitisation markets because the major banks had no need of securitisation when there was subsidised funding from the Bank of England. The TFS will almost certainly do the same. Frustrating.
Full marks to the Bank of England for a package of measures but in themselves they are not enough and we now need the Government to join in with Fiscal policies and other initiatives designed to both provide tangible help to the economy but, perhaps more importantly, show that the Government has what it takes and doesn’t just have to rely on the Bank of England for a ‘Big Bazooka’!