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Carney More Than Blows The Doors Off

4 August 2016 by Chris Bowie

For anyone familiar with the late 60’s crime caper “The Italian Job”, starring Michael Caine, there is a great line where Caine remonstrates with his explosives expert that he was only “supposed to blow the bloody doors off!” instead of demolishing the security van, when he is prototyping how much explosives to use in gaining entry to the stash of gold.

With the announcements today, Carney has more than blown the doors off, allowing Britain a very much greater chance of outperforming in the global self-preservation society rounds of stimuli we have seen post-crisis.

In combination, the base rate cut by 25bp to 0.25%, the £60Bn additional Gilt Q.E., the £10bn Corporate Bond Programme, the Term Funding Scheme, and the likelihood of rates being cut further to just 0.10% later this year should give the real economy the breathing room and stimulus it needs to help ensure we do not see two quarters of negative growth in 2017 or 2018 – but of course nothing is guaranteed. Normally the weakness in the pound we have seen recently and these additional measures taken together – other things being equal – would most likely lead to increased inflationary risks. But given the threats to business investment and consumer confidence these inflationary risks are far less likely to explode, quite different to the outcome in the Italian Job!

With regard to the Corporate Bond Purchase Programme specifically, some initial details appear encouraging for the strength of the market, at least for non-financials. It looks like the bonds bought will be senior, unsubordinated, non-callable structures, with at least one IG rating (unlike minimum of two last time), with a minimum outstanding of £100m. Interestingly, the primary market appears not to be included, with bonds needing to have been issued for at least one month. Some grey areas will need to be fleshed out, specifically around which non-UK domiciled businesses are included where they make a “material contribution to economic activity in the UK”.

For the UK corporate bond universe that is not directly eligible for the programme, the portfolio effect may well lead those bonds to rally too as portfolio managers recycle capital gains from eligible bonds into higher yielding assets. And whilst primary is directly excluded, the purchase programme should still help to underpin strong issuance for any borrower wishing to tap the sterling market. And lastly, with the Term Funding Scheme announcement today Mr. Carney is ensuring that households and businesses benefit from the transmission of lower rates into lower lending rates, helping the real economy without trashing net interest margins for banks (in fact he specifically has said he is not a fan of negative interest rates).

Further details are still to come out, but for now this is more than we expected, and it is very positive for all GBP credit assets, not just those assets that will be directly purchased. Whether the combined measures lead to greater inflationary expectations, and therefore a steeper yield curve, remains to be seen. But for now, just like in the film, this is a confidence shot in the arm for plucky British companies and households alike.

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