LONDON (Reuters) - The Bank of England’s easing of cash reserve rules for banks will boost lending, according to a Reuters poll that also concluded a drop in unemployment, not get-out clauses, will trigger the next interest rate rise.
Britain’s eight top lenders were told by the central bank on Wednesday they could cut their cash reserves by a collective 90 billion pounds ($140 billion) and use that money to support economic growth by lending more.
The poll, taken on Thursday, saw nearly three quarters of respondents saying that the plan would prove successful.
“Crucially, this is a 90 billion pounds liquidity boost that was not anticipated by the markets and therefore not priced into UK market rates,” said Lena Komileva at G+ Economics.
“While it makes no difference to UK base money - the part that the BoE has direct monetary control over - it will potentially boost UK broad money supply growth,” she said.
Mark Carney, in his maiden speech as Bank of England governor on Wednesday, said the relaxation “will help to underpin the supply of credit, since every pound currently held in liquid assets is a pound that could be lent to the real economy”.
He also said the Bank may provide more stimulus if financial markets stifled the fledgling recovery. But the poll gave only a median 30 percent chance that its quantitative easing programme would be restarted in the next year.
So far the BoE has pumped 375 billion pounds of new money into the economy by buying up government bonds. Only five people in the poll of 45 economists said it would make any further purchases.
The central bank said earlier this month that it would keep Bank Rate at a record low of 0.5 percent until unemployment fell to 7 percent or below, something it said could take three years to achieve. It was 7.8 percent in June.
But most respondents in the poll said it would fall before the Bank’s current estimate for the end of 2016, with many saying it would do so at least a year earlier. The majority of them also pencilled in a rate hike within three years.
Markets are still pricing in an upwards move in 2015.
When introducing its forward guidance the Bank added caveats, saying it would look at rates if the public inflation expectations rose significantly, if low rates threatened financial stability or if its own forecasts said inflation would be 2.5 percent higher in 18-24 months.
Still, only 40 of 46 said one of those get-out clauses would be breached before unemployment falls to within target.
“The knockouts were mentioned briefly in the (Carney) speech, but given little prominence. We suspect that markets over-rate the probability that the knockouts will play an active role in policy discussions in coming years,” said Michael Saunders at Citi.
Polling by Sarbani Haldar and Rahul Karunakar, Editing by Jeremy Gaunt