The Bank of England left quantitative easing (QE) and policy rates unchanged at the 7 May Monetary Policy Committee meeting. The decision to hold rates at 0.10% was unanimous but two members voted in favour of an immediate increase in QE by £100 billion. The Bank remains on high alert, with the meeting minutes noting that “all members agreed that the Committee would act rapidly should market conditions similar to those seen in mid-March re-emerge.”
The UK lockdown started to see a small easing in social distancing restrictions as the number of new pandemic cases fell during the month, sparking hopes it could lead to an increase in economic activity and slow recovery in economic data. Expectations are high, however, that the BoE will increase QE in June after two MPC members voted for it in May and the remaining five favoured waiting for more information.
Speculation of a negative policy rate increased after Governor Andrew Bailey and other policy makers refused to rule out the possibility of negative rates, but they made it clear that it’s far from a done deal. Meanwhile, the threat of a no-deal Brexit is back. While both the UK and EU insist a deal is still their preferred outcome, the deadlocked talks and the limited time left available mean the risk of no agreement being reached is rising. Instead of postponing its final departure from the bloc because of the coronavirus, the UK government has so far ruled out any delay. As negotiators head into the final round of talks scheduled before a key summit in June, the chances are growing that the UK will end the post-Brexit transition period on 31 December without a free trade agreement in place.
Britain posted a record budget deficit in April of £62.1 billion. The figure was equal to the total borrowing in the whole of the previous fiscal year. The UK economy shrank almost 6% in March, plunging into what may be its deepest recession in more than three centuries. The slump meant gross domestic product fell 2% in the first quarter. The lockdown saw the dominant services industry shrink by 6.2%. Manufacturing contracted 4.6% and construction lost 5.9% in March. While the unemployment rate surprised by falling in March, it is clear that the labour market is being hit hard. The most recent employment data suggest that 465,000 jobs were lost in April and the claimant count suggests that 856,000 more people are claiming Commentary Cash May 2020 Policy Outlook Monthly Cash Review State Street GBP Liquidity LVNAV Fund 2 out-of-work benefits. This will push the unemployment rate higher in the coming months. The fall in CPI inflation from 1.5% in March to 0.8% in April (versus consensus expectations of 0.9%) was the biggest drop since December 2008 and left inflation at its lowest since August 2016. The core measure (excluding food, alcohol and energy) slipped from 1.6% to 1.4% in April, driven by declines in clothing inflation as well as personal effects and travel goods.
Markets and liquidity conditions have continued to improve since the peak crisis point in midMarch and now have a much firmer tone. The improvement in market functionality that started in April was maintained through May as liquidity and confidence gradually returned. Trading volumes rose and market rates stabilised out to three months, with active selective trading within six months. As trading increased and duration lengthened, yields moved considerably lower from the stressed levels seen in March/April to something of a more normal level. One-month rates moved to 0.10% (from 0.30%), three-month rates to 0.20% (from 0.70%) and six-month rates to 0.30% (from 1.0%) over a few weeks. With more trading along the curve, banks are able to better translate their cost of funding via Libor, which dropped significantly lower. The three-month benchmark fixing fell to 0.23%, in comparison to 0.70% in April.
At the fund level, the weighted average maturity (WAM) remained low, sitting within a mid-20-day range. The lower WAM represented the extremely short-term nature of most investments during the period. The majority of investments placed were within a one-month maturity with selected high-quality investments made within a three-month maturity. Fund AUM also continued to see a healthy stream of subscriptions over the month. Liquidity was maintained at high levels at all times. Fund liquidity was covered with a combination of government and supranational holdings, gilt repo and bank deposits. The fund always maintained high credit quality.