It has been a dramatic day for UK monetary and fiscal policy but Sterling has barely budged.
The Bank of England announced at 07.00 that the Monetary Policy Council had held an emergency meeting and decided, in a unanimous vote, to cut its policy rate 50bp to 25bp – the first 50bp inter-meeting rate cut since October. Governor Carney, who steps down on Monday, also announced a new Term Funding Scheme, with additional funding incentives for banks lending to Small & Medium-sized Enterprises.
The Bank of England is clearly intent on getting a jump on a likely acceleration in economic activity’s downturn by ensuring that banks and corporates remain adequately and cheaply funded. UK GDP growth already slowed early in the year, with data out this morning showing zero month-on-month growth in January.
Sterling initially weakened slightly in the wake of the central bank’s announcement, with GBP/USD dropping from 1.294 to 1.287, before recouping its losses and spiking near 1.30. The cross has since eased back to around 1.292, with markets showing little reaction at this stage to recently appointed Chancellor of the Exchequer Rishi Sunak’s first-ever annual budget speech which started at 12.30.
This was, as expected, a fiscally expansive budget with Sunak announcing a number of short-term measures to support companies and individuals negatively impacted by the coronavirus and recent floods. There was also a panoply of longer-term measures aimed at boosting domestic investment in strategic industries and infrastructure.
The FTSE 100 is down 0.8% at time of writing, suggesting that Bank of England and Treasury measures to support and reflate the UK economy have somewhat under-whelmed markets. It is worth noting, however, that weakness in US equity markets – the S&P 500 is currently down 3.8% – may be taking the shine off UK stocks. It is clearly premature to assess how these large-scale measures will impact domestic growth in the near-term (let alone the long-term) and even whether and how they will feed through to financial markets.