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--TFS Helps Drive Effective Lower Bound Close To 0%, Impact Hard To Measure
By David Robinson
LONDON (MNI) - The announcement that the Bank of England (BOE) is taking
control of the Term Funding Scheme (TFS) -- shifting the risks associated with
the stg126 billion loans onto its balance sheet -- enhances BOE control over
policy transmission, but public finance experts told Market News that it should
not bolster the government's books.
They foresaw no benefit to the key public sector debt and borrowing
measures from the Treasury's move to stop indemnifying the TFS, which provides
banks with funds at close to the policy rate, while providing the BOE with a
stg1.2 billion capital injection to strengthen its balance sheet.
Statistics officials have yet to decide how the shift will be treated, but
as the transfer of the TFS only involves two public institutions -- the Treasury
and the central bank -- it should not impact aggregate public finance measures.
"This will change the risk profile between central government and the Bank,
but shouldn't have any impact on the total public sector balance sheet," Martin
Wheatcroft, a government finance specialist, stated.
--NO NET DEBT IMPACT
Wheatcroft said that as the capital injection is an intra-government
transaction it will "not affect the overall position shown in public sector net
debt, but will result in a relatively small increase in central government (and
hence general government) net debt."
This view was cautiously supported by Fraser Munro, who is responsible for
public finances data at the UK's Office for National Statistics.
"We haven't had the opportunity to finalise any implications and plans as
yet, though it would seem to me that at a public sector level there should be no
changes resulting from moving TFS onto the BoE balance sheet," Munro stated.
How to treat the transfer of the TFS will be formally discussed at an
upcoming official statistics classifications meeting.
"Intuitively, I would agree that there will be an increase in central
government (and general) net debt equivalent to the size of the capital
injection, which in turn would be offset by an equal and opposite impact on the
BoE's contribution to net debt; with no resulting change at a public sector
level," Munro said.
In theory, the Bank, rather than the Treasury, would be on the hook if the
banks were unable to repay the TFS loans.
Wheatcroft noted, however, that as the TFS recipients include high street
banks, "there would be more to worry about than whether TFS loans were repaid or
not," if these ran into trouble.
--ELB CLOSE TO ZERO
At its June meeting, the BOE's Monetary Policy Committee announced that it
was likely to start unwinding quantitative easing when the Bank Rate was raised
to 1.5%, rather than 2.0%. This is because it estimates that the effective lower
bound (ELB) -- a level below which monetary easing is no longer considered to be
stimulative -- is lower than previously thought, giving it more room to cut the
Bank Rate in a downturn.
The TFS, which supports bank lending at ultra-low rates, should push down
on the ELB -- and the Bank now has full control over it.
BOE Chief Economist Andrew Haldane, however, said that it was not possible
to isolate the TFS effect on the ELB when questioned about it by Market News
following his speech on Thursday.
"We thought the effective bound was a half (0.5%). Now, partly because the
financial sector is stronger, we think it should be lower than that -- close to
zero," Haldane said.
"Saying how much is (due to) this and how much is that, it is giving
spurious precision to do that. I certainly couldn't (do that)," Haldane added.
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