Pioneer’s Head of Multi Asset Investments, Matteo Germano, and Head of European Government Bonds, Cosimo Marasciulo, discussing the Bank of England’s new stimulus package, as well as the implications of the new wave of Central Banks actions.
The Bank of England (BOE) has just announced a new stimulus package and the first rate cut in seven years. How do you assess this move?
BOE surprised the market delivering a larger than expected stimulus package that is, quoting their own words, “timely, coherent and comprehensive”.
Beyond a 25bps rate cut, which was unanimously expected, they in fact increased purchases of Gilts by 60Bn, corporate bonds by 10Bn, as well as introduced a new “Term Funding Scheme” to reinforce the effect of the other measures and make sure that easing is passed through to the real economy.
The dovish stance was reinforced by the guidance that a majority of Monetary Policy Committee (MPC) members expect to cut the rate to near zero by year-end if their economic forecast is realized.
More generally on Central Banks, what do you think the next steps will be and how effective can these measures be?
At the moment the trend towards easing is quite strong in developed markets. The Bank of Japan (BoJ) has recently utilized the qualitative easing lever by almost doubling the amount of ETF purchases, and is ready with further measures if necessary; with the caveat that cutting the refinancing rate further seems, for now, to be a route they are not willing to pursue. The great ongoing QE efforts by the European Central Bank (ECB) and the BoJ, which have driven a large part of their respective government bonds into negative territory, impede significantly the Fed’s ability to raise interest rates going forward.
Zero and negative interest policies and quantitative easing have clearly compromised the effectiveness of monetary policies. Central bankers are calling loudly for more significant interventions on the fiscal side and for structural reforms. Even in the UK, the MPC clarified that while its actions can help moderate the adverse economic impact of a “supply shock,” monetary policy alone cannot prevail versus structural shocks. We believe that a more comprehensive and coordinated approach will be required to survive the low growth/low inflation scenario in the global economy.
From a bond investor’s perspective, how do you assess the recent BOE action?
Following the UK vote to leave the EU, we have had a preference for Gilts outright and versus sterling swap rates. The sharp drop in July sentiment indicators suggested to us that the BOE would introduce significant additional stimulative measures.
Going forward, the level of Gilts will be influenced by domestic factors as well as global dynamics in rates. At the current new level of UK rates – an all-time low – we expect Gilts to be favoured on a cross-country basis and relative to swap rates as long as the BOE remains supportive.
From a multi-asset perspective, what are the investment implications of this new wave of Central Bank actions?
From a multi-asset perspective the focus on Central Bank actions constitutes one of the major themes in our macro analysis. Indeed, after the Brexit vote, Central Bank actions are even more pertinent in our view as they become essential to preserve financial market stability amid concerns regarding global growth and lack of reform momentum.
We believe that current monetary policy stances support a positive bias towards European corporate bonds, but more generally, a cautious overall portfolio posture after Brexit. The ECB bond purchasing programme is already benefiting this sector and with the BOE also joining the corporate bond purchasing club under its new Quantitative Easing programme, we expect corporates to enjoy even stronger support going forward.