Reception to the Bank Of England Cut

Top asset managers operating in the UK address the Bank Of England's rate cut.
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The bank of Englan implemented emergency measures. Including a .5% rate cut, additionally, a set of shock measures have been implemented in an attempt to alleviate economic unrest.

Today, we have comments on the perspectives of the managers Aberdeen Standard Investments ,  LionTrust Newton IM , TwentyFour AM , Unigestion and Vontobel AM , to know in-depth what they expect from the coronavirus and the measures adopted by the Bank of England .

Bank of England

Luke Bartholomew, Investment Strategist at Aberdeen Standard Investments

In light of the dramatic market movements in recent weeks, the Bank of England’s decision to cut interest rates is not particularly surprising. While these measures cannot harm, they alone are unlikely to have a huge effect,  and monetary policy is clearly reaching the limit of what it can achieve. However, its impact can be multiplied if combined with significant fiscal relaxation. A coordinated policy assures investors that policy makers will do whatever it takes to try to mitigate any economic damage .

This is why it is so important for the government to announce an aggressive budget support package today in the budget. This should include a significant increase in resources for the health service and measures to support companies’ income and cash flow during the worst of the crisis  to ensure that they are not bankrupt due to temporary problems.

Robin Geffen, head of the Liontrust Global Equity Team

With interest rates practically at zero, this is very useful to reduce the cost of loans to almost free levels. The government can borrow for 30 or 50 years at almost no cost. This is going to be very important with the effect on the economy of both the Coronavirus and a possible hard Brexit at the end of the year.

However, the main economic challenge that Coronavirus presents is that companies can be deprived of cash flow oxygen for a temporary period when quarantine measures are implemented . While rate cuts are marginally useful, we will actually need direct fiscal support to companies to overcome them.

Paul Brain, Head of Fixed Income at Newton IM

We believe that the emergency cut in the Bank of England’s interest rates is part of a coordinated fiscal and monetary response to the growing economic impact of Covid-19. The British economy has not yet suffered the economic consequences of the travel restriction and the recommendation to stay home, so this cut can be considered preventive.. That it has been announced the same day that the general budgets sends a clear message that the authorities are coordinated. Other central banks are also lowering rates and focusing on ensuring increased liquidity. Some economies may not enjoy the same flexibility because their political systems are highly partisan or bureaucratic. While lowering the cost of money may be helpful, what is of most concern is the temporary impact on cash flows, so further measures will be necessary to keep companies afloat. AND

In our opinion, the evolution of the countercyclical buffer and term loans for SMEs will be more important and more useful than the rate cuts . The problem is not so much the cost of credit but rather that credit flows, something to which the two mentioned factors contribute. The gilts market was already discounting the cut, so we do not expect a significant reaction. When the economic threat has dissipated, the long-term implication will be to see an increase in tires if growth recovers.

Emma Mogford, British equity manager at Newton IM

The Bank of England was prepared to act and we believed that it would not limit itself to scheduled meetings and that it would approve an emergency rate cut if deemed necessary, as it did during the 2008 financial crisis. Now that interest rates have returned At its lowest level, the focus will shift to fiscal and public spending measuresto stimulate the economy. The first will be announced today as part of the general budget, and we hope they will focus on two issues: immediate measures to support health services and the economy during the coronavirus epidemic, and major infrastructure projects to meet the “leveling off” proposal. (leveling-up) of the British government. Today’s budgets are decisive because they mark the end of austerity.

In a five-year time horizon, we believe this will be the beginning of a long-term trend of increased fiscal spending by governments around the world. Companies in the building materials, infrastructure and housing construction sectors will be among the most benefited and the most important question is whether these measures will generate inflation.

Mark Holman, CEO of TwentyFour AM

Our view of the Bank of England’s decision this morning is that the institution has acted very selectively and in a timely manner, adding large volumes of liquidity at even lower rates, along with significant capital to the banking system. These measures should significantly encourage bank loans and provide strong support for this difficult period ahead.

For bank debt, it should be a positive thing, at a time when this asset has been affected, as it is considered to have a high beta level, especially since the financial crisis.

We especially liked Carney’s point of view on why this situation is different from 2008 from a banking point of view. The Bank of England has taken the lead on monetary policy here, now let’s see if the UK Treasury can impress on the fiscal side. In our opinion, it is time for the country to show the rest of the world its strongest colors once again after the Brexit debacle. This was a good start.

That said, a global problem cannot be solved by a single one of the G7 nations . What is required is coordinated action from around the world. As for the European Central Bank (ECB), we know that somehow it will not have the same impact, although  Christine Lagarde, its president, is doing everything possible to persuade the Eurozone states to open the fiscal coffers, which is what really necessary.

Salman Baig and Jeremy Gatto from Unigestion

We believe that the recent liquidation of the market is probably not over and there may be more difficult times ahead. Our preferred framework for assessing market risks revolves around three dimensions: macro, sentiment, and valuation. Currently, we consider the macro context to be favorable, but we expect a significant slowdown in the global economy as the COVID-19 virus continues to spread and the fiscal and monetary authorities are quick to respond. Investor sentiment has changed significantly from bullish to bearish and, in our opinion, it remains volatile. Finally, while valuations have become more attractive to growth-oriented assets, we believe there will be more downward revisions as investors learn more about the impact of the virus and the consequences of the collapse of oil prices on producers and refineries.

Today’s interest rate cut from the BOE interim meeting came as little surprise, as it appears to be part of a broader coordinated response by the Central Bank to the threat posed by the coronavirus (EDF and BOC also generated a cut in 50 sc last week). We expect some similar measures to come from other central banks, in particular from the ECB tomorrow. While this is encouraging, we do not believe it is sufficient to counter the macro shock posed by the virus at this stage, and we continue to expect markets to remain under pressure as both macro and sentiment continue to impact. We hope that future measures in the form of tax packages will be announced, however this may take some time to implement.

Frank Häusler, chief strategist at Vontobel AM

Aside from the coronavirus, this morning’s macro data was disappointing, GDP as well as industrial production and the oil price crisis weigh on the economy. Given the additional uncertainty of Brexit , which casts a shadow over the UK economy, we understand the BoE’s action . In their statement, they already mentioned that they are working closely with the government and that their action will be accompanied by an important fiscal package.

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Reception to the Bank Of England Cut