Six weeks after Mark Carney announced a barrage of Bank of England stimulus, he's given an upbeat assessment of the new measures.
The minutes of this week's Monetary Policy Committee meeting were littered with references to market metrics and spelled out how the package — unveiled in August in response to the Brexit vote — had led to a “greater than anticipated boost” to asset prices.
That’s notable because some economists and investors, including former BOE officials, had questioned how effective loosening would be since rates were already low and the central bank held 375 billion pounds of government bonds, about a quarter of the market.
As the record of the gathering noted, gilt yields, swap rates, the pound and corporate-bond spreads declined along with banks’ funding costs, and equities rose.
“In summary, the immediate impact of the U.K. policy package on asset prices had been greater than expected, and the committee would monitor closely the extent to which those asset price movements would be transmitted through to the broader economy.”
The stimulus effect can be seen in U.K. government bond yields relative to their U.S. peers, though the BOE did acknowledge that stronger-than-expected U.K. data and global policy shifts led to a reversal in recent weeks.
Carney told lawmakers last week that the current round of quantitative easing was proving to be at least as effective as the round the bank did in 2009 to ward off the financial crisis, a response to those who say returns diminish the more the tools are used:
“What we’re seeing is that mortgage rates have fallen a bit more than we would have expected. The yield curve has moved more, has moved down more than we might have calibrated.”
While the fact that stimulus already in place is having such a powerful impact may undermine the chance of another rate cut before the end of the year, officials are still seeking clarity on how all of this will filter through to spending, investment and demand in the longer-term. As the minutes said:
“Overall, while the evidence on the initial impact of the policy package had been encouraging, the committee would monitor closely changes in asset prices and in interest rates facing households and firms and their effect on economic activity.”
Sam Hill, Royal Bank of Canada’s senior economist in London, says a rate cut from the current 0.25 percent will still probably come in November, although the risks are shifting:
“They were clearly surprised in a positive way at how the markets had reacted to the August package. Given that this process of policy making is dynamic, one of the arguments against a further cut is that it seems as though they’ve delivered more stimulus than they anticipated.”