What does the BoE rate cut mean for UK equities?
The Bank of England (BoE) announced a 25 basis point (bp) cut in the base rate to 0.25% on Thursday 4 August, in line with market expectations, along with a package of other easing measures.
The Monetary Policy Committee also indicated that a further cut is likely by the end of the year. The easing measures include an expansion of UK government Gilt purchases by £60 billion, the purchase of £10 billion of investment grade corporate bonds and a Term Funding Scheme to help bank funding costs.
The Bank of England has given itself plenty of wiggle room to increase stimulus as it stated that each policy has the potential to be expanded if deemed necessary.
The announcement is broadly positive, especially for corporates, whose loan rates tend to be on a floating basis. The Term Funding Scheme appears generous, and we think the quantitative easing measures will be received positively by the market. The scheme replaces the old Funding for Lending Scheme and provides banks with £100 billon of financing (banks borrow directly from the BoE to fund lending rather than using customer deposits) at close to the 25bp bank rate, which should encourage lending.
The decision is a slight negative for UK domestic banks as a further cut in the base rate will squeeze deposit spreads, although the Term Funding Scheme may allow banks to lower their financing costs faster than they could have otherwise achieved.
Downward pressure on sterling should have a positive impact on UK exporters and benefit large, internationally exposed companies, so should not be a problem for the FTSE 100, where around 70% of earnings come from overseas.
Some market commentators have expressed concern about the diminishing returns of monetary stimulus. This may be true from an economic perspective, but history has shown that easy monetary policy is supportive for asset prices, including equities.
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