The UK's central bank aims to revive what it sees as a flagging economy after the Brexit vote with a rate cut. Wealth managers respond.

Yesterday, the Bank of England cut its official interest rate by 25 basis points to 0.25 per cent, with the central bank saying that weaker demand in the near term justifies the stimulus impact of the cut. With rates already at record lows, it is perhaps debateable whether such a cut will make a difference at this stage. The BoE also announced a new funding scheme to boost the impact of its rate cut and to purchase up to £10 billion of corporate bonds, aka quantitative easing; it is also boosting asset purchases of government bonds by £60 billion, taking the total amount of such purchases to £435 billion, paid for by greater reserve issuance.

Central banks such as the Bank of Japan, European Central Bank and the US Federal Reserve have taken similar steps down the years, with mixed results. Here is a selection of comments from wealth managers and other entities about the BoE's actions.

Russ Mould, investment director at AJ Bell
The risk from the Bank of England’s view is that the banks do not let the full benefit of cheaper money trickle through to corporates and consumers, preferring instead to sell their bonds or gilts to the Old Lady of Threadneedle Street and then simply sit on the cash.

Banks have three good reasons to hoard cheap capital on their balance sheets: 1) They are being told to boost tier-one capital ratios by their regulators; 2) They may be struggling to find creditworthy borrowers, so may view the risks associated with lending at low rates as simply too high. HSBC has decided to return $2.5 billion to investors via a share buyback rather than lend the money and try to make a profit on it; and 3) Their net interest margin – the gap between rates at which they pay interest on deposits and get paid interest on loans – is falling and therefore their profits are coming under pressure.

The Bank of England’s plan to offer cheap money and then entice banks to lend it with the Term Funding Scheme is designed to combat all three problems. The problem is, whilst money supply has gone up since QE, which should in theory lead to inflation and an increase in prices, it has not done so because the speed at which the money has circulated has been insufficient. The banks have sat on cash and consumers have too – lower returns mean they must spend less and put aside more for their future financial needs, especially retirement and health care.

Darren Bustin, head of derivatives at Royal London Asset Management
Monetary policy is running out of steam. The actions of the Bank of England today may not be the most effective tool in driving the UK economy going forward, and a fiscal response may be required to revive the economy if things get worse. One casualty of today will be pension schemes whose deficit is likely to get worse rather than better. It will also be a "wait and see" in regard to banks and their profitability.

Charles Hepworth, investment director, GAM
But what does lowering rates by 25 basis points actually do to the real economy? It is unlikely that it will reverse the downward trajectory in services PMI data in the short term and the manufacturing and construction sectors will not be jumping for joy at potentially lower borrowing costs when they are arguably already maxed out on debt obligations. The UK banking system will certainly not welcome increased pressure on their net interest margins (just ask the European banks) and savers will feel the pinch as saving rates fall ever closer to the event horizon of 0 per cent. This rate cut can only be seen as a symbolic admission of Brexit risks that are still a "known unknown" or perhaps even an "unknown unknown".

Peter Westaway, Vanguard’s chief economist and head of investment strategy group, Europe
Overall, the Bank's response reiterates the widely held concern that the UK economy is set for a sharp slowdown, notwithstanding the fact that the fall in the exchange rate and this policy response will "blunt" the impact of the shock to to the UK economy. 

Colin Morton, lead manager of the Franklin UK Equity Income Fund and Franklin UK Rising Dividends Fund
[Yesterday's] decision from the Bank of England marks a historic moment in recent UK monetary policy as they move to cushion the blow of a post-Brexit slowdown. The interest rate cut to 0.25 per cent was widely expected and priced in by the markets, but what has come as particularly welcome news is the size and scale of quantitative easing which has been announced, nudging the very top end of what had been forecast. This signals the Bank of England’s urgency and desire to address slow economic growth post Brexit and the potential impact on unemployment and consumer confidence, before it gains any real traction.

This announcement is another example of Mark Carney continuing to flex his muscles with a widening of the Bank of England’s role in traditionally more political matters. Whilst previously solely concerned with maintaining a 2 per cent inflation rate, today’s news implies the bank is now taking a longer term view and is expressing a wish to address the balance between growth and inflation. In this sense the Bank is taking more of a political role, taking factors such as unemployment into its considerations – this is highlighted by the Term Funding Scheme, designed to ensure the rate cut is passed on to consumers and businesses.

Philip Booth, academic and research director and representative of the Institute of Economic Affairs’ shadow monetary policy committee 
[The] decision to cut the base interest rate is both disappointing and ill-advised. The post-Brexit economic problems are down to consumer and business uncertainty and will not be solved by introducing monetary stimulus. By lowering interest rates, the Bank of England will distort the economy and potentially reduce growth.

Instead of altering monetary policy in a whirlwind panic based largely on surveys of business intentions, we need policies to de-regulate the economy in order to provide a healthier environment for business investment that will improve productivity and living standards.

Richard Clarke, head of investment management, KPMG UK
Another small cut after seven years of record low interest rates is unlikely to have a dramatic impact on the future of [the] UK investment management industry. Focus will remain on issues like assessing the impact of Brexit and meeting the changing demands of digital savvy customers.

However, even lower interest rates will reinforce the importance of asset management as the British public find it increasingly difficult to make returns. Asset managers will need to work hard to help their clients deploy their cash in a way which achieves their targeted returns without creating too much additional risk.