While the Bank of England (BOE) surprised markets by holding interest rates steady in July, the Bank announced an aggressive package of measures at their meeting on Thursday that had financial markets salivating once again. This package, intended to lower the cost of borrowing for households and businesses, comprises:
The last three elements will be financed by the issuance of central bank reserves, aka money printing. Sterling, the currency which the Bank are printing to buy the government bonds and corporate bonds from investors, moved lower following the announcement. As ever, conditioned equity markets rose on the news of more stimulus, but where does it all end with monetary stimulus?
One of the more memorable quotes from the last market peak came from Citigroup CEO Chuck Prince who said: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing”.
I get the feeling that everyone knows it will end badly, but the very nature of markets, how money is managed and the short term demands from investors, means that there is still no alternative but to keep on dancing. Those preferring to take the safety of a chair now run the risk of being too early, a conservatism which short term investors do not reward.