4 August, 2016
The Bank of England meets today for the second time post Brexit vote, and after failing to deliver in its July meeting, expectations are too high for some sort of easing measures to prevent the economy from falling into a prolonged recession. The central bank will also release its forecast for growth and inflation in its August inflation report which will be interesting to see if policy makers expect the economy to fall into a technical recession.
Although GDP and employment figures releases last month showed some strength, the central bank will look beyond them as they’re only lagging indicators. In fact, PMI data for July showed significant deterioration in sentiments within all economic sectors. This probably isn’t enough to completely assess the short term-impact on the economy, but would certainly spur the BoE to take action.
Since policymakers met in July14, Sterling has been moving in a range of 1.3055 – 1.3480, and it would require a big surprise to see a breakout from current range. Markets have already priced in a 25 basis point rate cut, and I do not expect any steeper move in this meeting. Markets will be closely watching Mark Carney’s comments on how low interest rates can go and whether negative rates are an option.
The BoE might also extend its funding for lending program which was originally launched in July 2012 to continue encouraging banks to lend to the economy, but the big question is whether the central bank will restart their asset purchase program currently at £375 billion. If they decided to expand QE another question will arise, which is how much will be allocated to cooperate bonds as impact on gilts likely to be negligible at current low yields.
I will be surprised if the BoE sits on its hands today and does nothing, at least a 25 basis points rate cut for now, and any action beyond that will likely take Sterling below 1.30 against the U.S. dollar.
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