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Big Picture

The last cut is the deepest

Monday 12th September 2016

In a widely-anticipated move following Britain's vote to leave the European Union, the Bank cut the rate from 0.5% to 0.25% last month and added £70bn to its quantitative easing (QE) programme.


It said the vote for Brexit had led to a falling exchange rate and “weakened markedly” the outlook for growth in the short to medium term. The 25 basis point cut was the BoE’s first since 2009 and sees the rate fall to an all time low. The extra QE will include the purchase of £60bn of UK government bonds, taking the total stock of these asset purchases to £435bn from the current £375bn, and up to £10bn of UK corporate bonds.

Both 10 and 20-year gilt yields hit record lows following the announcement, with the yield on 10-year government debt falling to 0.67%. M&G, which composed the chart above, said the market had already priced in a 100% chance of a rate cut to 0.25%, but added: “What came as a surprise was the extent of the stimulus package, which could expand the bank’s balance sheet by £170bn, including £10bn of corporate bond purchases. Soft economic indicators released post referendum suggest a large decline in business activity and consumer confidence. Because of the likely downturn in economic growth in 2017 as indicated by the BoE slashing its growth forecasts from 2.3% to 0.8%, the MPC decided to act pre-emptively and has announced a package of measures aimed at supporting the UK economy.”

The rate cut, in combination with the post-Brexit fallout, caused the aggregate funding level for UK pension schemes to near an all-time low. PPF figures revealed the estimated deficit for the 5,945 defined benefit (DB) schemes eligible for entry to the lifeboat fund, increased from £383.6bn at the end of June to £408bn at the end of July – a funding level decrease from 78% to 77.4%. Blackrock head of UK strategic clients Andrew Tunningley said: “Pension scheme funding remains down in the dumps. The path of future rates is likely to be even lower for an even longer period, confirmed by the Bank of England’s decision to cut the Bank Rate to 0.25% and indications there could be further cuts to around zero.”


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