Following last week’s US Federal Reserve emergency rate cut in response to market turmoil sparked by coronavirus panic, the Bank of England has today slashed interest rates in a bid to save the economy – but asset managers have mixed feelings about the move.
On Wednesday, in an unscheduled meeting, it was unanimously agreed to cut the bank rate from 0.75% to 0.25% in an attempt to counter the market chaos caused by the spread of the Covid-19 contagion.
But for Artur Baluszynski, head of research at Henderson Rowe, “there is very little the BoE can do to repair the damage done to the economy” by the virus, which has sparked the biggest rout in global markets since the 2008 financial crisis.
“They are doing the only thing they can – starting to ease and lubricate the financial system. The BoE will try to throw everything they have at this crisis while waiting for the government to start some sort of fiscal stimulus,” he said.
When global share prices plummeted once again on March 9, some market commentators warned a recession was almost certain this year.
In the last week of February, when the virus spread further, investors rushed to pull their cash out of equities.
Celine Hartmanshenn, global head of risk at trade finance provider Stenn Group said the Bank of England “wasted no time cutting rates to near rock bottom levels”.
“While it may bring some benefit to consumers and heavily indebted companies, lowering interest rates is unlikely to help prevent the economic wrath of the coronavirus,” she said, adding that lowering rates helps stock markets – “but the real economy isn’t a stock market”.
At Legg Mason, the decision was welcomed. Michael Browne, a fund manager at the fund house recently acquired by Franklin Templeton, said that, aside from the rate cut, the central bank’s package could free up to £200 billion of liquidity.
“As the coronavirus is both a supply and demand side shock, we would expect further measures on the fiscal side later today from the Chancellor in his budget,” he said.
“If this is the case, then the UK will be following China’s leadership in counter measures which markets will hope are followed In the USA and in particular Europe.”
Brendan Walsh, senior vice president and portfolio manager at Franklin Templeton Multi Asset Solutions, said: “The increase in cases of COVID–19 over the weekend coincided with Saudi Arabia launching a price war on oil delivering another shock to an already fragile and illiquid market. While financial conditions are not yet tight, market liquidity is at a premium which will exacerbate moves. We expect volatility to continue and for liquid assets to underperform in the near term.”
For Adam Vettese, an analyst at multi-asset investment platform eToro, the rate cut came as unexpected.
“In the short term this could spook markets, showing as it does the severity of the coronavirus epidemic, especially as the Bank also said it would relax capital rules to free up billions of pounds to provide extra borrowing power to the economy,” he said.
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