On August 4th last year, the Bank of England announced a series of easing measures in response to the Brexit referendum results. They were very concerned regarding a potential slowdown and collapse in both the economy and corporate confidence and so implemented a variety of measures; reducing interest rates, increasing liquidity lines for banks, and reintroducing their gilt and corporate bond purchase programmes. Since then, growth has remained positive, and unemployment has continued to be low. The measures appear to have helped.
These ‘crisis response’ measures are however not new, having previously been implemented in 2008 to similar effect, in response to the far larger financial crisis. Though this time around, being near the limit of zero rates in 2016 meant the Bank leaned more heavily on non-conventional monetary policy measures, as illustrated in the table below.
|Corporate bond purchases||£2.3bn||£10.0bn|
|Term Funding Scheme Loans||£41,836m||£33,828m|
|Change in unemployment||+ 2.17% *||– 0.26% **|
|Change in inflation (CPI, yoy)||– 2.2% *||+2.1% **|
* November 2008 – November 2009
** June 2016 – August 2017
The scorecard above illustrates the differences economically and in terms of policy response. The Bank used the same policy tools, though more unconventionally weighted, when faced with a smaller crisis. The most notable feature is the disproportional purchase of corporate bonds this time around versus other measures; four times as much corporate quantitative easing has been undertaken compared to the Great Financial Crisis. This was due to fears that companies would not be able to fund themselves and financial dislocation would occur. Partly as a result of the Bank’s emergency actions, markets fortunately remained firmly open – here and abroad – for U.K. companies.
Glancing back to the scorecard which demonstrates the stability of markets over the last year (i.e. with unemployment continuing to fall), the need for aggressive monetary policy and emergency measures has lessened. The chart below shows corporate bond spreads in the U.K. Although they did widen on the shock Brexit vote, they have since returned to new post financial crisis tights. The Bank is in agreement that aggressive emergency measures are no longer necessary; it has completed and ceased its corporate bond buying programme, and recently committee members at the Bank have been advocating the reversal of the ‘emergency’ rate cut of 2016. This is in stark contrast to this time last year when the Bank had a bias towards easing. A reversal of policy appears to be on the cards.
From a rate perspective, removing the quarter point cut is not that dramatic as the conventional policy response was limited last year. From a corporate bond perspective however, selling the corporates back to the market could potentially weigh on the performance of sterling corporate bonds held by the Bank.
During the Great Financial Crisis the Bank bought bonds from March 2009 and completed selling them back to the market by April 2013, this time round they bought them in a seven month window from September 2016 to April 2017. Will the Bank now sell these holdings and if so, when?
In answer to the first question, I think they will. The one major unwind of emergency policy of the Great Financial Crisis was the selling back of the non-gilts purchased, to the market; I do not see why it should be different this time. Indeed we have a situation where the Bank wants to potentially tighten policy, the need for emergency funding appears low, and in fact the Bank has been arguing recently that lending conditions are getting too lax from a prudential perspective. One way to solve this is to let the private sector fund corporate debt, having been potentially crowded out of that option by the Bank’s significant corporate bond buying programme.
Going forward there are still Brexit uncertainties, but one aspect perhaps less so: the Bank of England meetings will at some point not only be discussing the direction of interest rates, but when to sell its corporate bond holdings.