Bank of England Cuts the Rate and Increased the Asset Purchase

Takeaways from the BOE’s monetary policy meeting

The BOE’s (Bank of England) (EWU) monetary policy meeting decision was announced on August 4, 2016. The BOE cut the key rates to 0.25% as a measure to address the global uncertainties after the Brexit vote. This is the first rate cut by the BOE in over seven years. The following chart shows the BOE’s major monetary easing measures.

Bank of England Cuts the Rate and Increased the Asset Purchase

Among the other major changes, the BOE (EZU) monetary policy committee decided to increase the government bond asset purchase by 60 billion pounds to 435 billion. This was done despite dissent from three members.

The corporate bond purchase was also approved with a cap of 10 billion pounds. The BOE will also launch a TFS (term funding scheme) that will provide funding to the banks at rates close to the Bank rate.

How would the TFS make the total asset purchase increase by 170 billion?

The TFS is meant to reinforce the transmission of the decreased interest rates to households and firms. The TFS will work as part of the asset purchase facility. The TFS will have an upper cap of 100 billion. Together, the 100 billion combined with the 60 billion government bonds and 10 billion corporate bonds will account for an increase in the asset purchase facility by 170 billion pounds.

We would be covering the following aspects of TFS:

  • instituition eligibility
  • time period
  • amount eligibility
  • extra allowance in case of increased lending
  • penalty in case of reduced lending

The institutions that are part of the BOE’s sterling monetary framework and signed for the discount window facility will be eligible for the TFS. These institutions will be allowed to borrow at close to Bank rate for four years. The amount eligible for borrowing will be equivalent to 5% of the stock of their lending to United Kingdom businesses and households. The institutions will also be eligible for a pound for every pound increase in their lending expansion between June 2016 to December 2017. In addition, there will be an increase of 5 basis points for every 1% fall in lending. This will be capped at 25 basis points above the bank rate.

This will have a direct impact on United Kingdom-based banking ADRs like Royal Bank of Scotland Group PLC (RBS), HSBC Holdings (HSBC), Barclays (BCS).