Ian Kernohan, RLAM's Economist, comments on QE extension
Markets had been expecting QE extension either this month or next, so today's move doesn't come as a major surprise, though after the latest set of slightly stronger PMIs, there was some feeling that they might hold off until November.The Bank are giving a very strong signal that interest rates are going to remain at rock bottom levels for a considerable period, at least until 2013.
Comment from Kames Capital's head of international rates, John McNeill, on today's decision by the Bank of England's Monetary Policy Committee.
"The Bank of England has kept Bank Rate unchanged at 0.5% but has increased the size of the Asset Purchase Programme by an additional £75bn to £275bn. The Asset Purchases will be in the form of purchases of gilts. Recent evidence of stagnant growth and increased risks from the external environment, especially the euro-zone, have persuaded the Bank to provide further stimulus despite the fact that current inflation is still far above target."
Russell Chapman, Head of Financial Risk Management at Hymans Robertson, leading independent pensions and benefits consultancy says:
“Today’s announcement comes as no surprise and, to some extent, a second round of quantitative easing was already priced into markets.
“While the full impact of this decision will take time to emerge, a further quarter-point (0.25%) fall in yields would add another £25bn to FTSE350 pension liabilities. For many pension schemes, this will see nearly all of the improvement of the previous two years wiped out, and they may be back to where they were in 2009.
“Equity markets might respond positively to the stimulus. Interest rate protection looks expensive at the moment, but if we are entering a long term, low growth environment, it may be worth paying up front for that protection.
“The key point for pension schemes is that economic conditions remain challenging and the outlook is uncertain. This increases the need for Trustees and Scheme sponsors to develop a clear plan for managing their pension fund risk. Volatile markets mean there are likely to be opportunities to reduce risk through trimming equity or inflation hedging, and schemes need to position themselves to take advantage”
Comment from Mark Gull, Partner at Pension Corporation following the BoE decision today
Bank of England has announced that it will add a further £ 75 million to its QE programme to help stimulate the economy and it appears that this money will be primarily be used to buy gilts with maturities from 3 years to 25 years. Avoiding buying very long dated gilts and Index linked gilts will lessen the impact on pension fund liabilities but as gilt yield are driven lower pension fund deficits will still rise.
In its statement the BoE has added “the strains in bank funding markets may also inhibit the availability of credit to consumers and businesses.”
we iterate our view that as the BoE recognises the strains in bank funding these could be alleviated by buying financial bonds - so directly bringing down banks funding costs. After all in the the last round of QE the BoE bought non-financial bonds to help non-financials with their cost of funding.
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