All the speculation that central banks are putting the brakes on unconventional monetary policy and shifting to fiscal stimulus demands, were tossed aside this morning when the BOE launched what was been dubbed a "kitchen sink" response, one in which it not only cut rates for the first time since the financial crisis, by 25 bps to a record low 0.25%, but also boosted QE while announcing it would resume corporate bond purchases.
The market reaction was fast and furious: the pound fell the most in four weeks as traders were caught by surprise by the dovishness of the BOE's statement: Cable crashed over 1% percent against all of its 16 major peers, with the GBPUSD tumbline to the mid 1.31s, after the nine-member Monetary Policy Committee voted unanimously to lower the benchmark rate by 25 basis points to a record-low 0.25 percent.
U.K. government bonds jumped, pushing the 10-year gilt yield to a record low. Benchmark 10-year gilt yields dropped 16 basis points, or 0.16 percentage point, to 0.65 percent, and touched 0.634 percent. The 2 percent bond due in September 2025 rose 1.44, or 14.40 pounds per 1,000-pound face amount, to 111.92. The nation’s two-year gilt yield fell 11 basis points to 0.09 percent.
30Y Gilts also dropped to a record low 1.5%
The BOE’s decision will “be initially negative for the currency as the pound rejoins the ranks of the funding currencies, but without having the luxury of a current account surplus,” Kamal Sharma, a London-based foreign-exchange and rates strategist at Bank of America Merrill Lynch, said before the announcement. “The worst thing that could happen now is the stimulus does not work, so better to do too much. They should throw the kitchen sink at the problem.”
More importantly, this may not be the end of its as the BOE may join other central banks to lower rates to negative in its upcoming meetings to catch up to European peers.
And so, once again, the biggest winners from Brexit are the "1%" holders of financial assets, as rates on deposits which matter to the rest of the population, were just cut in half.