Word of the Day “Action”: Stimulus “Whatever It Takes” Bank of England Style

As expected, the Bank of England cut interest rates today to 0.25% from 0.5%.

The move leaves the US as the only major player talking about rate hikes. But as we have seen, there’s far more Fed talk than Fed action.

If you are looking for “action”, a count shows the BoE used that word eight times today in its Monetary Policy Summary following today’s rate cut announcement.

The British pound fell 1.52% but the FTSE stock market loved the “action” as BoE Mark Carney said the central would take “whatever action is needed” to promote financial and price stability.

I cannot find the word “whatever” in the BoE statement, but the Telegraph used that precise phrase.

Bank of England Delivers Action

The Telegraph reports Pound plunges as Bank of England Cuts Interest Rates for First Time Since 2009.

The Bank of England has unveiled a four-pronged stimulus package designed to boost the economy and prevent a recession following the vote to leave the European Union.

Policymakers signalled that they were likely to vote for further cuts towards zero within months.

Staff slashed their year-ahead UK growth forecasts on Thursday by the biggest margin since it started publishing quarterly economic forecasts in 1993, but stopped short of forecasting a Brexit-induced recession.

In a £170bn package of additional measures designed to stimulate the economy, the Bank announced it would:

1. Expand its quantitative easing programme by £60bn, taking its stockpile of asset purchases up to £435bn over the coming six months, from £375bn today.
2. Buy up to £10bn of high quality corporate debt from an estimated pool of around £150bn to drive down funding costs. While more details will be announced before the purchases start in September, policymakers said buying these bonds “could provide more stimulus than the same amount of gilt purchases”.
3. Launch a £100bn “Term Funding Scheme” designed to offset the impact of cutting interest rates on bank profits. This will allow commercial banks to borrow a proportion of their outstanding lending to UK businesses and households for four years at around 0.25pc. The scheme will be funded by new money created by the Bank.

[Counting the rate cut, that is actually four actions]

Mr Carney said the Bank would take “whatever action is needed” to promote financial and price stability. “Some of the adjustments to this new reality may prove difficult and many will take time. But the UK can handle change,” he said.

The Governorsaid the steps policymakers had taken to offset the impact of lower rates on commercial banks’ net interest margins meant that there was “no excuse” for banks not to pass on the lower rates to borrowers.

“Through the actions taken today … we have improved the economic outcomes for this country. There will be less unemployment, more activity, and there will be a greater prospect of a successful adjustment to the new realities that the UK faces,” he said.

Investigating the Pound’s Plunge

The move lower today did not even take the pound to lows seen in the week following Brexit.

Today’s dip was more related to the additional actions by the BOE than the rate cut itself. The pound may very well be bottoming here.

FTSE vs. Brexit

Coordinated Counter-Action

Bonds rallied in the US today in possible reaction to the BOE stimulus actions. Party on dudes.

Mike “Mish” Shedlock