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Free AccessMNI INSIGHT: BOE Term Funding Likely Revived In No-Deal Brexit
--Policy Easing Likeliest Outcome On No Deal; TFS To Come Back
By David Robinson
LONDON (MNI) - A no-deal Brexit would likely prompt monetary policy easing
by the Bank of England as well as the swift resurrection of the Term Funding
Scheme (TFS), its vehicle for ensuring a rate cut is passed on by lenders, MNI
understands.
The TFS was launched after the 2016 vote to leave the European Union, and
Bank of England research indicates it was successful in ensuring that a lower
Bank Rate fed through to commercial bank lending rates to the public.
In a speech last week, Monetary Policy Committee (MPC) member Michael
Saunders said the abnormally weak pass-through to lending rates from recent
increases in Bank Rate, from 0.25% to 0.75%, indicated diminishing returns to
monetary policy near the effective lower bound (ELB), the level at which
additional rate cuts add no extra stimulus. Deposit rates appear sticky at low
levels, and if net interest margins on commercial, mortgages and other household
loans are funded through deposits they too tend to move little.
"Close to the ELB, a lower policy rate would be reflected mainly in wider
lending spreads ... rather than lower mortgage rates," Saunders said.
This could be a problem if the Bank needs to ease in the event of a hard
Brexit. In August 2016, responding to the EU referendum, its solution was not
only to cut Bank Rate to 0.25% but also to deploy the TFS. This allowed lenders
to borrow for four years at Bank Rate so long as they maintained, or increased,
lending to the real economy.
A BOE research paper by Bianca Ginelli Nardi and others published in
December concluded that, "consistent with market intelligence ... the TFS has
been effective in allowing participants to pass through the reduction in Bank
Rate into lower lending rates."
"The TFS probably also helped lower the effective lower bound for the
policy rate," Saunders stated in a footnote to his speech.
--TENREYRO JOINS VLIEGHE SAYING NO-DEAL EASING LIKELY
Meanwhile, another MPC member has indicated the Bank's response to a
disorderly Brexit would be more likely to be easing. Until recently, the MPC had
insisted that, in the event of no deal, policy could be eased, left on hold or
tightened depending on the relative magnitude of any fall in the exchange rate,
and of hits to supply and demand.
External MPC member Gertjan Vlieghe was first to publicly break ranks,
saying easing would be more probable. Last Thursday fellow external MPC Silvana
Tenreyro echoed his thoughts, stating that "a situation where the negative
demand effects outweigh those other effects is more likely."
The analytical framework that points to easing being most likely is
orthodox modern central banking. While central banks can do nothing if supply
chains are disrupted and business investment is axed, they can help cushion the
initial demand shock, Jagjit Chadha, head of the National Institute of Economic
and Social Research, said at an event last Wednesday.
"Even if it is a long-run (supply) problem the extent to which demand
overshoots in the short run makes a case for an easing of policy which can then
be reversed at the appropriate time," he said.
Easing is likely to come in the form of a rate cut, with the MPC having
previously estimated the ELB is very close to zero - probably around 0.1%.
In August 2017 the MPC voted to close the TFS to new drawings, and Bank
Rate was hiked to 0.5% in November 2017. A disorderly Brexit at end-March could
well see it, or something similar, reopened.
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$]
To read the full story
Sign up now for free trial access to this content.
Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.