The Bank of England (BoE) has cut interest rates from 0.5% to 0.25% and added £70bn to its quantitative easing (QE) programme, it announced today.
It said the decision was made following the UK’s vote to leave the European Union which had led to a falling exchange rate and weakened markedly the outlook for growth in the short to medium term.
The 25 basis point drop is the BoE’s first cut since 2009 and sees the rate fall to the lowest level in the bank’s 322-year history.
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%.
The BoE said the rate cut had been voted for unanimously by the nine members of its monetary policy committee, while the vote to buy UK corporate bonds was an 8-1 decision and UK gilts was 6-3.
On its decision to expand its asset purchase programme, the BoE explained: “Given the extent of the likely weakness in demand relative to supply, the MPC judges it appropriate to provide additional stimulus to the economy, thereby reducing the amount of spare capacity at the cost of a temporary period of above-target inflation.
“Not only will such action help to eliminate the degree of spare capacity over time, but because a persistent shortfall in aggregate demand would pull down on inflation in the medium term, it should also ensure that inflation does not fall back below the target beyond the forecast horizon.”
The move to cut rates was well-flagged and fully expected by markets, but Hymans Robertson said the QE extension was less expected and had subsequently caused UK pension schemes deficits to rocket to record highs.
Partner Patrick Bloomfield said: “Markets had already reacted to the announcement with yields going lower and yesterday total DB deficits stood at £885bn. However, the QE package announced by the MPC hadn’t been entirely priced into markets. That’s why today we’ve seen record lows in gilt yields leading to pension liabilities increasing by £70bn to £2.4trn, reaching record highs. The UK DB deficit now stands at a new record high of £945bn.”
Redington head of DB pensions Dan Mikulskis said pension schemes undertaking actuarial valuations at the June or September quarter ends are likely to show stressed positions – with higher deficits despite reasonable asset growth.
“Schemes are likely to need increased sponsor contributions, or will seek higher asset returns, or push out recovery plans,” he said. “A combination of all three could even be required.”
He added: “Today’s announcement also puts on the table tangible scenarios, such as recession or further QE, that could push long-dated interest rates even lower.”
Legg Mason co-CEO and RARE Infrastructure CIO Nick Langley said: “Whether the intervention is enough to revive the UK’s flagging economy remains to be seen, but for investors it does mean income is going to be harder to come by. With cash already yielding next to nothing, this latest cut will likely see rates fall even further.”
