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| Eurozone crisis live: Bank of England unveils £100bn to fight eurozone threat | Eurozone crisis live: Bank of England unveils £100bn to fight eurozone threat |
| (31 minutes later) | |
| 8.53am: Encouragingly, Spanish and Italian bond yields have fallen back this morning. Spanish ten-year yields, which breached 7% yesterday, are down 10 basis points at 6.85% in early trading while the Italian equivalent is just a shade over 6%, also down 10 bps. | |
| European shares have moved higher, with Spain's Ibex and Italy's FTSE MiB now both up 1.3%. The FTSE has climbed 0.6%, Germany's Dax is 0.8% ahead and France's CAC 0.9%. | |
| 8.47am: Citi economist Michael Saunders notes that Sir Mervyn King last night abruptly shifted the Bank of England's stance on the economy and policy outlook. Saunders reckons that the emergency measures on its own won't be enough to tackle the growing crisis. | |
| First, he acknowledged that the economy has underperformed and is likely to stay weak: "Instead of a gradual recovery, output has been broadly flat…Since our Inflation Report only four weeks ago, conditions have deteriorated with weakening business surveys, a downward revision to measured output, and further slowing in economies overseas." | |
| King stressed in particular the widespread adverse effects of the EMU crisis on the UK economy, hitting exports, raising bank funding costs and creating a general mood of caution that encourages firms and households to delay spending. The governor reiterated (a point he has made before) that the EMU crisis will not end until its underlying causes - deep economic problems in periphery countries and widespread weakness in euro area banks – are resolved: "Until losses are recognised, and reflected in balance sheets, the current problems will drag on. An honest recognition of those losses would require a major recapitalisation of the European banking system." | |
| Second, King made no mention of the inflation worries shared by some MPC members, moving straight from the weaker economic outlook to the case for extra stimulus – extra monetary stimulus plus measures to encourage bank lending. He stressed that both are needed. | |
| In our view, these measures may not immediately be enough to fully insulate the UK economy from the EMU crisis, as well as to overcome the domestic drags from high household debt and tight fiscal policy. But more can be done: QE and the "funding for lending" scheme can be expanded markedly further, while the BoE also can cut Bank Rate. Moreover, if the EMU crisis remains severe or intensifies, temporary fiscal stimulus via tax cuts or extra public investment is likely later this year to negate the existing heavy restraint planned for 2013 and 2014. The authorities have options for stimulus, and these are now being mobilised. | |
| 8.45am: Manchester Business School's banking expert Ismail Erturk is less enamoured with the new "funding for lending" scheme - describing it as "aimless fire power". | |
| The chancellor claims that the fire power of £80bn will protect the UK economy from the effects of the euro crisis. What UK needs is not some macho talk on fire power of monetary policy. The Bank of England has been doing this since 2008 and there is no evidence that it is working. Instead we are creating a new zombie institution Bank of England with unpredictable risky consequences. What the UK needs is an intelligent comprehensive policy to reform banking and to allocate capital to the right industries that can generate growth and employment. Aimless fire power will not work. | |
| 8.35am: Alan Clarke at Scotia Bank also likes the Bank's new measures which he describes as "thinking outside the box". Will it work? | |
| On the plus side, it is timely. This comes at a crucial time ahead of the weekend elections in Greece. The Bank has hinted that it has contingency plans in the event of disaster, but has now started to flex its muscles and show that it means business. The tweaking in the FPC mandate is welcome. Not only will that committee be charged with taking away the punchbowl just as the party is getting going, it will also be on hand to provide pitchers of red bull and vodka if the revellers are failing to embrace the party animal spirit. The UK has had much higher Libor rates than elsewhere and the early market reaction has been to reverse that. | |
| However, he identified a number of potential weaknesses in the plan. | |
| 1.) Incentive structure: "sustaining or expanding" loans. More specifically, the Bank will provide funding to banks "at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the non-financial sector…" Past schemes have been conditional on banks increasing their loan books, but we have hardly seen a dramatic rebound in lending. We need to hope that the incentive structure is better designed in this scheme to put less emphasis on the "sustaining" and more on the "expanding" loans. | |
| 2.) Targeting the flow rather than the stock of loans. The scheme appears to want to encourage the provision of new loans at more competitive rates of interest rather than alleviate the burden on existing borrowers. While it is admirable to want to help first time buyers and new loans to businesses, this is a much smaller group than were the Bank to explicitly target reducing costs of existing loans. Targeting new loans: a.) Relies on there being sufficient appetite for new loans. Demand may be held back by risk aversion given the sluggish outlook for growth and storms in Europe, lack of deposit for a new home etc. b.) An implicit assumption that the boost from new loans will work its way through the system and help kick start hiring and investment and wider domestic demand further down the road. | |
| Our point is, it is a little indirect. Our preference has been to reduce the gap between the average mortgage rate paid by existing borrowers relative to Bank rate. To do so would immediately give a boost to household real disposable income growth, which would boost consumer spending which represents 2/3 of GDP by expenditure. It affects a much larger group of people and behaves like an old-fashioned interest rate cut. At the moment, the gap is far too wide and about to widen, with several banks announcing mortgage rate hikes. | |
| He concludes: | |
| Our hope is that it doesn't repeat the Eurozone style announcement where initial euphoria is very quickly wiped out. In stark contrast to continental Europe, the UK government and central bank are acting in unison. Hence despite continued undertones of reluctance on Mervyn Kings' part, there must be a greater chance that this scheme succeeds where others have failed. | |
| 8.21am: The immediate reaction from City economists to the Bank of England's emergency package is positive. Malcolm Barr at JPMorgan Chase says the measures are "unambiguously positive" for the outlook: | 8.21am: The immediate reaction from City economists to the Bank of England's emergency package is positive. Malcolm Barr at JPMorgan Chase says the measures are "unambiguously positive" for the outlook: |
| The credit easing part of the above is the most significant, and newspapers cite aides to Osborne as speaking of measures that could boost lending to the private sector by £80bn (5.2% of GDP). That gives some sense of the potential size of the scheme, by way of comparison the ECB's 3 year LTROs extended term lending worth near 10.7% of regional GDP. There is obviously significant detail still to be forthcoming. | |
| Recent UK experience of attempting to set measurable targets for bank lending in return for forms of support for banks has not been a happy one. However, the initial scale of the scheme is significant, and it differs from the Osborne's SME credit easing scheme by appearing that it will be funded by reserve creation and involve loans to the banks rather than providing a guarantee on bank issued debt. | Recent UK experience of attempting to set measurable targets for bank lending in return for forms of support for banks has not been a happy one. However, the initial scale of the scheme is significant, and it differs from the Osborne's SME credit easing scheme by appearing that it will be funded by reserve creation and involve loans to the banks rather than providing a guarantee on bank issued debt. |
| Having expressed our concerns that the marginal impact of QE was fading, we regard these steps as unambiguously positive for the outlook, even as we are disappointed (thought not surprised) that the Chancellor continues to show little flexibility on the issue of infrastructure spending initially funded directly and undertaken by the state. | Having expressed our concerns that the marginal impact of QE was fading, we regard these steps as unambiguously positive for the outlook, even as we are disappointed (thought not surprised) that the Chancellor continues to show little flexibility on the issue of infrastructure spending initially funded directly and undertaken by the state. |
| 8.17am: European stock markets have opened higher. The FTSE 100 index in London has climbed 35 points, or 0.65%, to 5502, while Germany's Dax is up 32 points, or 0.5%, to 6171 and France's CAC has gained 16 points, or 0.5%, to 3048. Spain's Ibex added 0.7% and Italy's FTSE MiB was up 0.6%. | |
| 8.12am: The Bank of England hints that the new ECTR auctions - which are similar to the ECB's LTROs - are aimed to protect British banks from the storm raging on the continent. | 8.12am: The Bank of England hints that the new ECTR auctions - which are similar to the ECB's LTROs - are aimed to protect British banks from the storm raging on the continent. |
| The ECTR Facility enables the Bank to ensure that the banking sector has sufficient access to sterling liquidity to mitigate risks arising from unexpected shocks. | The ECTR Facility enables the Bank to ensure that the banking sector has sufficient access to sterling liquidity to mitigate risks arising from unexpected shocks. |
| 8.05am: The Bank of England has announced that the first Extended Collateral Term Repo Facility auction will be next Wednesday and it will hold at least one such auction a month until further notice. The auctions are part of a new emergency package of measures to get more credit flowing through the UK economy as the eurozone crisis deepens. | 8.05am: The Bank of England has announced that the first Extended Collateral Term Repo Facility auction will be next Wednesday and it will hold at least one such auction a month until further notice. The auctions are part of a new emergency package of measures to get more credit flowing through the UK economy as the eurozone crisis deepens. |
| At each auction, it will offer at least £5bn of cheap credit (six-month loans against collateral) to banks. The size will be announced on the day before the auction. The Bank will lend the money at a minium of Bank rate, which is currently 0.5%, plus an additional 25 basis points. | At each auction, it will offer at least £5bn of cheap credit (six-month loans against collateral) to banks. The size will be announced on the day before the auction. The Bank will lend the money at a minium of Bank rate, which is currently 0.5%, plus an additional 25 basis points. |
| 7.30am: Good morning and welcome back to our rolling coverage of the eurozone debt crisis and world economy. The weekend elections in Greece will continue to weigh on markets today, while Spain's woes continue to worse, with its borrowing costs rising through 7% on the 10-year measure yesterday. They were at 6.9% this morning. | 7.30am: Good morning and welcome back to our rolling coverage of the eurozone debt crisis and world economy. The weekend elections in Greece will continue to weigh on markets today, while Spain's woes continue to worse, with its borrowing costs rising through 7% on the 10-year measure yesterday. They were at 6.9% this morning. |
| The Mansion House speeches in the City are usually a fairly boring affair. Not so last night. Bank of England governor Sir Mervyn King and chancellor George Osborne unveiled two new initiatives to help banks and boost business lending. The emergency measures are an indication of how worried they are about the economic situation. Osborne warned that the "debt storm" on the continent had left the UK and the rest of Europe facing their worst peacetime economic crisis. | The Mansion House speeches in the City are usually a fairly boring affair. Not so last night. Bank of England governor Sir Mervyn King and chancellor George Osborne unveiled two new initiatives to help banks and boost business lending. The emergency measures are an indication of how worried they are about the economic situation. Osborne warned that the "debt storm" on the continent had left the UK and the rest of Europe facing their worst peacetime economic crisis. |
| The Bank of England will start pumping up to £100bn of cheap credit into the UK economy - at least £5bn a month - within the next few days. This is on top of its £325bn quantitative easing (QE) programme. The schedule for the Extended Collateral Term Repo Facility auctions - which are reminiscent of the ECB's LTROs - will be set out at 8am. And under a new "funding for lending" scheme, worth up to £80bn, the Bank will provide cheap loans to banks for several years, at below market rates, in exchange for the banks lending the money to households and small and medium-sized businesses. | The Bank of England will start pumping up to £100bn of cheap credit into the UK economy - at least £5bn a month - within the next few days. This is on top of its £325bn quantitative easing (QE) programme. The schedule for the Extended Collateral Term Repo Facility auctions - which are reminiscent of the ECB's LTROs - will be set out at 8am. And under a new "funding for lending" scheme, worth up to £80bn, the Bank will provide cheap loans to banks for several years, at below market rates, in exchange for the banks lending the money to households and small and medium-sized businesses. |
| King also dropped a heavy hint that more QE could be on its way: "The case for further monetary easing is growing." He rejected the suggestion, from monetary policy committee member Adam Posen earlier this week, that the Bank should move away from gilt purchases towards private sector assets. His argument is that the Bank does not have a mandate to put taxpayers' money at risk by making outright purchases of risky assets. | King also dropped a heavy hint that more QE could be on its way: "The case for further monetary easing is growing." He rejected the suggestion, from monetary policy committee member Adam Posen earlier this week, that the Bank should move away from gilt purchases towards private sector assets. His argument is that the Bank does not have a mandate to put taxpayers' money at risk by making outright purchases of risky assets. |
| Simon Hayes at Barclays Capital said: | Simon Hayes at Barclays Capital said: |
| It is clear from governor King's speech that he has become more gravely concerned about the economic outlook, even over just the past few weeks. Heightened uncertainty about the euro area is increasingly infecting the UK outlook through tighter credit conditions and low confidence among businesses and households. Not only has this prompted the new announcements on banking sector support, but it also implies a much increased likelihood that the MPC will sanction more QE. | It is clear from governor King's speech that he has become more gravely concerned about the economic outlook, even over just the past few weeks. Heightened uncertainty about the euro area is increasingly infecting the UK outlook through tighter credit conditions and low confidence among businesses and households. Not only has this prompted the new announcements on banking sector support, but it also implies a much increased likelihood that the MPC will sanction more QE. |