Bank of England preview: A precautionary cut - Danske

On Thursday, the Bank of England (BoE) will announce its decision on monetary policy, after the first meeting of the Monetary Policy Committee (MPC) after the Brexit referendum. According to analysts from Danske Bank, the central bank will cut the rate from 0.50% to 0.25% and announced more easing in August.

Key Quotes:

“We expect the BoE to make a precautionary 25bp cut from 0.50% to 0.25% and at the same time communicate that more easing could come. BoE governor Mark Carney was very dovish in his recent speech stating that ‘some monetary policy easing will likely be required over the summer’ due to a deterioration of the economic outlook. We interpreted this as a preannouncement of monetary policy easing as the speech was announced so suddenly and so soon before the July meeting.”

“We do not buy into the story that the BoE will have to tighten monetary policy, as a weaker GBP would lead to higher inflation.”

“The reason we do not expect more aggressive easing in July is that Carney said that the BoE will make an ‘initial assessment’ in July and the ‘full assessment’ in August, when the next Inflation Report including new economic projections is due out.”

“Carney has also said he considers the July and August meetings to be a ‘package’ and that the BoE will ‘discuss further the range of instruments at our disposal’ in August.”

“We expect it to cut the Bank Rate down to 0.00% in August and possibly ease using unconventional tools when the full assessment of Brexit is made. We think the BoE will resume buying assets under its Asset Purchase Facility (APF) but it could also use its Funding for Lending Scheme (FLS) in order to boost lending to the real economy.”