Keep Calm and Carry On

Last Thursday morning the Bank of England (BOE) offered a long list of monetary accommodation gifts to help the British economy cope with the fallout from Brexit. Even with this bazooka blast of liquidity, the BOE is projecting GDP in the U.K. to be only 0.8% in 2017, down from its previous projection of 2.3% made before the Brexit vote. This is the biggest GDP projection adjustment the bank has ever made, which prompts us to speculate just how low GDP could have gone without these gifts of monetary accommodation!  Keep Calm and Carry On, indeed.

BOE UK GDP Projection Based on Interest Rates at 0.25%, Other Policy Actions as Announced(Inflation Report August 4, 2016)

The gifts include lowering the U.K. Bank Rate to 25bps (a new all-time low), an expansion of the asset purchase scheme for U.K. government bonds for up to 60 billion pounds, a new authorization to purchase 10 billion pounds of U.K. corporate bonds, and a new 100 billion-pound Term Funding Scheme. The Term Funding Scheme lets U.K. banks borrow at rates close to the Bank Rate, which is far lower than the previous borrowing rate of about 100 bps. This added liquidity should help banks lend at a more attractive rate to UK businesses and consumers–and it should help maintain U.K. banks’ profitability in this very low interest rate environment. Quite the pile of gifts under the tree.

However, it is clear the BOE is growing tired of giving, or perhaps running out of suitable presents. In the obligatory letter sent from the Governor of the BOE, Mark Carney, to Chancellor of the Exchequer Philip Hammond, Carney notes that it is now time for politicians to come up with real solutions to these real economic problems, as monetary policy can only go so far. This is good advice for the new U.K. government, and even for politicians in the U.S., the E.U. and Japan.

Sources: Bank of England, Financial Times, Bloomberg