U.K. QE Backstops Revised Growth Projections

by: Research Recap

Fitch Ratings says that the Bank of England’s (BoE) announcement of GBP75bn of additional quantitative easing (QE) is a mitigant to the downside risks in the agency’s UK growth forecast, rather than a reason to revise it upwards at this stage. Fitch rates the UK ‘AAA’ with a Stable Outlook.

“Fitch’s forecasts factor in an expectation of continuing loose monetary policy offsetting fiscal tightening,” says Ed Parker, Managing Director in Fitch’s European Sovereign group. “Yesterday’s announcement is consistent with this, and underlines the Bank of England’s willingness and ability to act to counter the impact of weakening global economic and financial conditions.”

Sterling’s continued status as a reserve currency and strong track record in respect of government debt gives it better scope than many other economies to pursue QE without undermining the bond market’s confidence, or stoking inflationary expectations.

While a further round of QE may weaken sterling, Fitch expects the effect to be limited.

Plans being floated by the UK government to intervene more directly to ease lending to corporates have the potential to encourage expansion in the sector, but only if they are appropriately targeted. The BoE previously engaged in corporate bond purchases as part of its Asset Purchase Facility scheme, but these purchases were focused on the bonds of large, typically highly-rated corporates such as BT Group plc (’BBB’/Stable) and Vodafone Group Plc (’A-’/Stable).

The corporate funding market is currently bifurcated, with investment-grade borrowers still able to borrow from the market and banks at or near record low all-in rates, but borrowers further down the credit spectrum are more challenged in both availability and pricing. A policy which effectively channels funding to the latter group, which includes high-yield borrowers and SMEs, could make a real difference to both liquidity and business investment by these companies.