XPS comments on Bank of England’s latest rate cut

To limit the drop in UK GDP to a short and sharp ‘blip’ companies need to survive such that they can pick back up where they left off when things return to normal. A key issue will be financial markets enabling companies to do this by supporting with financing in the meantime.

The Bank of England’s latest measures support this. Quantitative easing is a means of getting this financing into the economy, but it needs to be channelled to the areas it is most needed and this is a complex pathway. With the new initiative permitting large companies to issue commercial paper to the Bank this allows the banking industry to spend more of their efforts financing small and medium sized companies which would otherwise take longer for the stimulus to trickle through to.

The link to pension scheme investment performance over the last week has been difficult to reconcile as we have seen staggering oscillations in long-dated government bond yields in the last few days.  A lot of this activity reflects the banks needing to find liquidity as part of providing the essential funding to companies. Selling gilts being one way to raise needed cash.

However ideally a pension scheme should be immunised against movements on long-dated yields using Liability Driven Investment (LDI) - it is a rollercoaster that many pension schemes want to get off.