Bank Of England's Package Is Radical Stuff

As the clock ticked down to midday, there were some who wondered out loud whether the Bank of England would under-deliver.

Having disappointed markets by not cutting rates last month, would they do the same again this time?

The short answer is a big fat no.

:: Bank Cuts Base Interest Rate To Historic Low

The package unveiled by the central bank is one of the biggest in its history, second only to March 2009, when it slashed rates and, for the first time, started printing money and buying assets through its quantitative easing programme.

To understand why, you need to take a step back.

Because this isn't just about interest rates - though of course much of the attention on Thursday will be focused on them. And, of course, the reduction of borrowing costs to 0.25% - the lowest level in history - is very eye-catching indeed.

As is the pledge from the Monetary Policy Committee to cut rates to just above zero in the coming months unless there is a sudden improvement in the economy.

But the Bank's package goes well beyond lower rates. There will also be a £100bn Term Funding Scheme (TFS (Dusseldorf: UFW.DU - news) ), designed to provide high street banks with cheap funding to encourage them to pass on the rate cuts to businesses and households.

The Bank will buy £10bn of corporate bonds - an ambitious target given the last time it tried to do so it only managed to buy £2bn of them. It (Other OTC: ITGL - news) will also buy a further £60bn of government debt.

The significant thing about all of the above is that these (up to) £170bn of purchases will be financed by money creation. The Bank will print money to buy all those assets. In other words, this package involves pumping a significant slug of money into the economy.

It is, bluntly, radical stuff, and probably goes further than many in the markets were expecting from the Bank.

Is it the right stuff? That depends on how you look at it. From a institutional political perspective, it is a canny move. Now (NYSE: DNOW - news) , if the economy slides towards a recession, the Bank can say: "Told you so."

If it does better than expected, the Bank can claim it is at least partly down to its intervention on Thursday. It is, in short, a win-win. And it underlines that there is at least one institution in the UK ready to step in if the UK faces a potential slump.

:: What Does The Interest Rate Cut Mean For You?

But there is a genuine question as to how much difference this will make. Interest rates are already as near as dammit to zero. The Bank has already gone further and faster than most other central banks when it came to quantitative easing. And there are legitimate questions as to whether, at this level, rate cuts will help or hinder the economy.

Indeed, the TFS (yet another new central banking acronym) is designed specifically to ensure banks don't face balance sheet crises of their own in the wake of the rate cut.

For most economists, the onus of responding to the potential slowdown facing the UK should be on the Treasury rather than the Bank, which is seen as already having used a significant proportion of its ammunition.

All eyes, then, will swivel to the Chancellor, Philip Hammond. He promised on Thursday to take "any necessary steps to support the economy and promote confidence", borrowing a line from European Central Bank president Mario Draghi, who promised in 2012 to do "whatever it takes" to save the euro.

However, in the absence of an emergency budget we will have to wait months to find out precisely what he is proposing.