BoE Preview: Precautionary cut in July, more easing in August – Danske Bank

Mikael Olai Milhøj, Senior Analyst at Danske Bank, suggests that the Bank of England’s (BoE) next monetary policy announcement is due today at 13:00 CEST when the Monetary Policy Committee concludes its July meeting.

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.

There are initial signs that growth is slowing further after Brexit as both business confidence and consumer confidence have fallen markedly and the number of job vacancies has decreased by 700,000. 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.

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.”