The MPC also voted unanimously to enlarge the TFSME (Term Funding Scheme with additional incentives for SMEs) which was announced a week ago in its first intra-meeting action since the Global Financial Crisis.
The scheme will be available to drawdown for 12 months starting in April, providing additional incentives for banks to support lending to the SMEs.
Similar to the TFS, the scheme has a maturity of four years and the participating banks have the flexibility to repay in full or in part ahead of the scheme’s maturity.
Zero base rate
The market now expects the BoE base rate to be cut to zero for the next year.
Forecasts for three-month LIBOR (London Inter-Bank Offered Rate) and two-year swap rate were lowered by 25bps to 25bps for the next three months, while the forecast for three-year swap rate remained the same at 50bps.
Forecasts for five-year swap rate and 10-year swap rate, on the other hand, increased by 25bps to 75bps.
The Bank of England is taking out the big guns. The rate cut is mostly just a signal – trimming another 15bp to 0.10 per cent will have a negligible impact, as rates are already so low.
What will make a big difference are the two other measures announced by the bank – a massive 45 per cent increase in the quantitative easing programme to £645bn, and even more money to the funding schemes that can get cash to consumers and small businesses
Crowded market in recovery
Traditional banks and building societies have already lowered interest rates on mortgage products in response to the previous rate cuts on 11 March, resulting in mortgage customers benefitting from cheaper interest rates.
Due to the elevated volatility in the financial markets, we expect little activity from lenders to raise new funding this month until there are some signs of stabilisation and decreased volatility which can result in a very crowded market at some point this quarter when the market recovers.
Of note, the TFS launched by the BoE is likely to reduce the number of prime lenders accessing the wholesale market this year given they will take advantage of the cheap funding offered by the central bank.
The lack of supply may drive market spreads down in the second half of the year for non-bank lenders relying fully on the wholesale market to raise new funds – similar dynamics as post the Brexit vote in 2016.