XPS responds to Bank of England interest rate cuts

The cut in the bank rate from 0.75% to 0.25% today could prove bitter sweet for pension schemes. The surprise move will likely bolster asset values such as equities but will add weight to the falling gilt yields. These falls have proved to be as much if not more damaging to pension funding levels than equity market falls so far this year. Pension liabilities have risen substantially off the back of falling gilt yields which at the shorter maturities are linked closely to the bank rate.

Further, there are differing views on whether monetary policy can provide effective support in response to Coronavirus. The rationale being you can’t boost the economy by encouraging people to spend money, if people can’t go to work to meet the demand. The side effect therefore could be a rise in inflation which would add to pension scheme liabilities.

Time will tell if the strategy works.