BoE Policy Details Emerge
GBP was the big-mover in the European session as more details emerged about the BoE’s Extended Collateral Term Repo (ECTR) Facility. The pound initially came under heavy pressure as the BoE announced the ECTR will have a minimum bid rate of just 25bp above the base rate, meaning that banks can access funding a lot cheaper than many had expected (indeed in December 2011, this spread was announced to be 125 bp when the facility was first brought to the market’s attention). However, with bank stocks reacting positively to the announcements, the pound quickly reversed those losses as investors rewarded the pro-active nature of the policy announcements. Last night, UK Finance Minister Osborne announced that the government and the BoE will jointly launch a new bank funding scheme with the specific aim of boosting bank lending to the real economy. The intention is to provide subsidised funding to banks for a period of several years at below market rates. Funding availability will be linked to a bank’s performance at maintaining or expanding its lending activities. The details are yet to be finalized but BoE Governor King said he hopes the scheme will be up and running “within a few weeks”. Although this represents a significant expansion of the BoE’s policy toolkit, a similar scheme is already operated by the BoJ where cheap central bank money is channeled to Japanese commercial banks who pledge to on-lend the cash to “growth industries” in the real economy. We believe that the sterling impact will be minor as the pro-growth positives are counterbalanced by the currency-negativity associated with central bank balance sheet expansion. Finally, referring to the prospect of further asset purchases, King noted that “the case for further monetary easing is growing” and he pointed specifically to economic weakness that has surfaced since the latest quarterly inflation report was published. These remarks support the view of our UK economist that further Gilt purchases are in the pipeline and could be announced at the August policy meeting. It is also unclear at this stage whether the facility will see extensive use. The Bank of Japan took no further easing steps at its policy meeting overnight. USDJPY was unmoved on the BoJ announcement itself, but a cascade of stop losses earlier sent the pair 50 pips lower.
Click here to read the full report: UBS Morning Adviser America
UBS Investment Bank