Bank of England’s (BoE) balance sheet expansion will be larger than it meets the eye

Yesterday, the Bank of England (BoE) delivered a comprehensive package of measures to address the weakness in the UK economy after the June referendum that could result in an eventual Brexit from the European Union. It included a rate cut of 25 basis points, an increase in asset purchases by £60 billion that will increase the total asset purchases to £435 billion. An introduction of corporate bond purchases of £10 billion. These measures were more than what the market was expecting.

However, the above measures are not the biggest bazooka it launched. It introduced in addition to the above a Term funding Scheme (TFS), it is probably the most innovative measure in the whole package and likely to be the most effective one for the real economy.

• The scheme is designed to mitigate the risks to the banks’ margins so that their profitability doesn’t drag.
• It would provide lenders £100 billion to lend to the real economy.
• It could be bigger as commercial banks will be able to borrow additional amounts as long as they expand credit to the real economy.

So, why will the balance sheet expand?

The central bank will fund this £100 billion via balance sheet expansion, which means it is a bigger quantitative easing tool.