'The solution of yesteryear': Industry says BoE rate cut is 'meaningless'

Bailey announced the bank would slash UK interest rates by 15 basis points, having already cut rates by 50 basis points one week before from 0.75% to 0.25%.

Yesterday's move, which is the latest monetary policy bid to help tackle the economic fallout caused by the coronavirus pandemic, marks the lowest interest rates seen in England since the Bank was founded in 1649.

Additionally, the BoE voted in favour of an additional £200bn of government bonds and sterling non-financial investment-grade corporate bonds purchases, bringing the total to £645bn.

Kevin Doran, chief investment officer at AJ Bell, warned this is a case of central bankers "using the playbook from the last financial crisis".

"Overnight we saw the ECB roll out the QE cannons and, now in an effort to be seen doing ‘something', the Bank of England have waded in with an emergency rate cut," he said.

"It is the solution of yesteryear when liquidity and credit were the problems. This time it truly is different - with a workforce on lockdown, there is a production chasm about to open up." 

He added that, to fill the gap, policy makers need to be working with governments to introduce formal debt relief. "Not forbearance, not interest holidays, but genuine relief from servicing debts as the world enters its enforced hibernation," he said.

Quilter Investors' Hinesh Patel agreed with Doran, billing the move as "meaningless" and simply the result of the BoE's fears surrounding tight monetary conditions and how these will damage economic prospects.

He said: "The more critical piece of the puzzle is the announcement of a £200bn increase in quantitative easing, in particular the purchase of private sector assets. This was very much in line with the ECB's earlier announcement of a similar policy overnight and shows the central banks are doing everything they can to prevent the credit markets seizing up, which in Europe is more important than in the US for a functioning economy."

"The program should help contain gilt yields and credit spreads, but in the short term volatility will remain a feature in the market as the number of confirmed coronavirus cases continues to climb."

Helal Miah, investment research analyst at The Share Centre, also said the future of the economy, and of stockmarkets, remains far more dependent on containing the coronavirus itself than it does on monetary policy.

"Of course this rate cut will do nothing in slowing the spread of the disease, which is more dependent on the UK Government's measures," he reasoned. "It may also be little comfort for small businesses facing an Armageddon scenario and may do little to stop job losses racking up.

"However, the BoE's actions that are coordinated with government strategies to prevent job losses will do much to prevent a dire economic situation after the virus disappears. In this regard we need to see more action from the government to support the Bank of England's effort, such as the discussions in the market along the lines of policies preventing firms from laying off employees."

Dr Kerstin Braun, president of trade finance provider Stenn Group, called the move from the central bank "surprising", given that the Chancellor has "only just announced a huge £330bn rescue package for businesses and it will be too soon to see any real effect".

"Reduced rates will not be enough to prop up the economy alone and we know from recent weeks it is unlikely to restore confidence in investors, so we could see global shares fall further in the coming days," she warned. "Access to cheap money is not our biggest problem right now but it does provide an important cut in borrowing costs for businesses and consumers at this delicate moment, helping to provide some financial respite from the virus.

"At the beginning of the year, before the coronavirus, our study found half of UK firms predicted a 2020 recession and we're starting to see this play out."

Ahmer Tirmizi, investment manager at 7IM, added that economic conditions have indeed changed significantly over the last few weeks, let alone since the start of the year.

"It may be more appropriate to quote Lenin, who once said, 'There are decades where nothing happens; and there are weeks where decades happen'," he said.

"It certainly feels like decades have happened over the last few weeks. The FTSE is closer to 5,000 than to 8,000, the UK economy is in full shutdown and sterling has just hit a 35-year low. Some have criticised the UK Government's reaction to the spread of the coronavirus and questioned whether it has been timely enough.

"What is less in doubt, is the reaction to the economic fallout. It has been timely. State guaranteed loans worth 15% of GDP, direct support for businesses worth £15bn (0.9% of GDP) which comes on top of £12bn (0.6% of GDP) announced in the budget. To top it all off, the Bank of England has cut rates, first from 0.75% to 0.25% and now all the way to rock bottom - 0.1%."

That said, Tirmizi added it remained to be seen as to whether "this will be enough". However, he said it was clear that the UK Government "is trying to tell us that they will do what is necessary to save the economy".

He added: "If things get worse from here, expect more from the people in charge."

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• Topics
• Investment
• The Stenn Group
• economy
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• Andrew Bailey
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• The Share Centre
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• Quilter