BOE preview from Danske
The Bank of England's (BoE) next monetary policy announcement is due this coming Thursday at 13:00 CEST when the Monetary Policy Committee concludes its July meeting. 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.
We think the BoE will communicate that the weaker GBP would only push inflation above its target temporarily, as was the case during the financial crisis. While analysts are split on whether the BoE will cut by 25bp in July or stay on hold, markets have priced in an 80% probability of a cut in July. They have priced in approximately 1.5 cuts by year end.
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. It is worth noting that at the BoE press conference in May, Carney said that a Brexit could lead to a UK recession - implying that the UK economy needs more than just one rate cut to support the economy. The fact that the BoE lowered the countercyclical capital buffer from 0.50% to 0.00% so soon after the UK's EU vote was also a signal that the BoE will be aggressive, in our view.
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.
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