No New BoJ Easing
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. Policy activism was instead more obvious in the 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. It is also unclear at this stage whether the facility will see extensive use. In addition, King announced that a separate tool known as the Extended Collateral Term Repo (ECTR) Facility – which was first unveiled in December – will now be activated for the first time. This is clearly an attempt to prepare for possible market stress arising from the Greek election over the weekend – the facility’s purpose is to provide sterling liquidity “in response to actual or prospective market-wide stress of an exceptional nature” and its activation alone should not in itself have any sterling impact. The bank will publish further details on this later today but for now we note it resembles a hybrid between the ECB’s marginal lending facility and an ECB LTRO – indications are that sterling liquidity will be made available for 6m, but at a punitive interest rate spread of at least 125bp above the policy rate. A wide range of collateral will be accepted as befits an emergency facility, but it seems the BoE intends to auction fixed amounts of liquidity only, rather than follow the ECB’s approach of providing as much liquidity as the banking system requests. This should ensure a modest impact on the central bank’s balance sheet. 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. We remain cautious on sterling and keep our 12m Cable forecast of 1.44.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank