In response to today’s decision by the Bank of England to cut interest rates from 0.5 per cent to 0.25 per cent, Dr Walter Boettcher
, Chief Economist and Director of Research
“The Bank of England really has limited dry powder, a marginal interest rate cut will make little difference, except to squeeze bank margins further. A further £70 billion of quantitative easing through carefully targeted asset purchases may make a difference, but it looks increasingly as the stimulus baton may have to be handed to the Treasury. Look for fiscal stimulus going forward in form of new long-term investment in infrastructure and other strategic assets.
“The Prime Minister has already suggested that emphasis on the Northern Powerhouse and the North West will be broadened to include all regions of the UK, so look for new investment initiatives across regions that have demonstrated a willingness to work sub-regionally through combined authorities, as for example the Sheffield City Region, North East Combined Authority, Tees Valley, Derby and Derbyshire, Nottingham and Nottinghamshire, the West Midlands and West of England.”
Impact on Investment Market
Given limited leverage, pricing uncertainty and record low gilt rates, the interest rate cut will make little difference to domestic investors. For non-sterling denominated investors, the rate cut will weaken sterling further and add further shine to UK assets which are already being targeted by overseas investors.
Impact on Occupier Market
While the marginal rate cut will have little technical impact on the availability and cost of debt to the corporate sector, it may have a psychological effect, although it is hard to say whether the effect is positive of negative. While the idea of a rate cut is meant buoy confidence by showing that the Bank of England is willing to support the economy with stimulus, it may also undermine confidence by suggesting that the economy may be in a worse state than already portrayed. Until there is hard data the MPC may be shooting in the dark.