Bank of England eases policy with prudence and surprise

The Bank of England (BoE) successfully handled the demand for easing and was successful in surprising the market, even if by a little. In addition to that it has taken up other measures, which are prudent and will ease the liquidity pressure if any for the banks.

The bank has delivered a comprehensive package that includes,

• A 25 basis points rate cut;
• A new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate;
• The purchase of up to £10 billion of UK corporate bonds; and
• An expansion of the asset purchase scheme for UK government bonds to £435 billion.

These measures would lead to an increase in central bank reserves in the system.

The rate cut will lead to lower capital cost for the banks. The increase in asset purchase, which came as a surprise should boost sentiment. An introduction to corporate asset purchases will reduce the risk premia demanded by investors in simple word the spread between corporate securities and gilts. The Term funding scheme would ensure credit flows to the economy and the lower interest rate passes through.

The pound has been declining since the announcement and currently trading at 1.317 against the dollar.