Daily Brief

A big day for sterling

Co-ordinated action

Ahead of London’s opening, the Bank of England announced this morning that it was cutting its Bank Rate from 0.75% to 0.25% and introducing “a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves”. The news took sterling lower.

The rate cut itself will make little practical difference to most borrowers. Its purpose is to attract attention and look impressive. The TFSME, on the other hand, is intended to provide struggling businesses with what they really need right now: cash flow. With customers staying away in droves, restaurateurs and other firms have seen revenues dry up. Yet they still have wages and bills to pay. It is not cheaper money that they need, it is cash to tide them over.

Investors delivered the obvious knee-jerk reaction to the rate cut, sending the pound more than half a cent lower. Then they cottoned on to the real purpose of the strategy and sterling bounced back. It must surely be fair to assume that the Old Lady’s action was cleared with the chancellor. His budget at lunchtime will doubtless include more to shield the economy from the tragic Covid-19 outbreak.


Words not actions

Two days ago the US President announced he would unveil on Tuesday a package of economic stimulus for people and businesses affected by coronavirus. His pledge helped risk assets to correct from Monday’s extreme lows. But Trump failed to show up yesterday, so the worries re-emerged and the safe-haven yen and franc were back on top.

The US is not the only world power accused of not being proactive enough to counter the economic impact of Covid-19. Beyond allowing airlines to stop flying empty planes, all the EU has managed to come up with is a promise to do “whatever it takes”.

Investors were less convinced than they were eight years ago when former European Central Bank president Mario Draghi first made such a promise about preserving the euro. In 2012 Sig Draghi scotched, at a stroke, the almost universal bearishness towards the euro. Yesterday the European Council made not a jot of difference, leaving the single currency unchanged on the day against the US dollar.


Leading the world

By the end of today, it is possible that Britain will have put itself in the vanguard of the economic fight against Covid-19. Although the rate cut is clearly a negative for sterling, investors might come to see upside in the whole package when it is made clear.

Tuesday’s economic data did not count for much and the same is likely to be true of today’s. Overnight the Westpac index of consumer sentiment fell 3.8% to its lowest level since 2014. There was better news from the housing market, with mortgage approvals rising 4.6% in January.

Today’s schedule belongs almost entirely to Britain and the United States. This morning brings the US figures for output and trade. The US inflation data appear at lunchtime, around the time the chancellor delivers his budget after prime minister’s questions.

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