BoE monetary policy guidance: Summer rate cuts coming - RBS

Research Team at RBS, notes that the Bank Of England Governor, Mark Carney, has given a clear indication that the BoE will cut policy rates over the next few months and is primed to sanction additional easing measures: ‘The economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.’

Key Quotes

“We expect two 25bp Bank Rate cuts by the 15th September 2016 MPC meeting. The precise timing is not completely clear but the BoE has clearly given itself the option of cutting Bank Rate at the next scheduled meeting on 14th July 2016. A cut at the 4th August 2016 quarterly Inflation Report meeting seems all but certain – either a follow-up 25bp cut or perhaps a 50bp reduction if there was no move in July. Either way, we expect a cumulative 50bp of policy rate cuts, taking Bank Rate to 0.0% by mid- September 2016.

A persistent & material slowdown requires looser policy: The message is abundantly clear: the slowdown is expected to be ‘persistent’ and ‘material’. On that basis, there seems little merit in delaying policy action. The Bank’s more formal, detailed projections will appear in the August Inflation report, but there are evidently sufficient grounds for policy easing as soon as the scheduled meeting on 15th July. Indeed, have signalled clearly that policy easing is imminent it might be self-defeating to delay.

Continued caution on negative policy rates: The BoE continues to sounds cautious, sceptical even, about a move into negative territory on Bank Rate. The Governor referenced the BoE’s ‘joined-up approach’ (PRA scrutiny of financial institutions, the FPC’s oversight of systemic risk) and observed that ‘If interest rates are too low (or negative), the hit to bank profitability could perversely reduce credit availability or even increase its overall price.’ (30 June 2016).

Additional policy measures – resumption of QE?: It is also clear that policy easing will not end with 50bp of Bank Rate cuts. As the Governor noted, the BoE can ‘deploy a wide range of instruments’. The MPC will ‘make an initial assessment on 14th July and a full assessment complete with a new forecast will follow in the August Inflation Report. In August we will also discuss further the range of instruments at our disposal.’ This may well hint at Bank Rate cuts in July and August, with the MP preparing the ground for a resumption of QE asset purchases (gilts rather than corporate bonds) and possibly beefed-up Funding-for-Lending type initiatives.

Liquidity provision: Governor Carney also reiterated the BoE’s existing commitment to support market liquidity via its preparedness to provide £250bn of additional funds through its normal facilities. The BoE’s Indexed Long-Term Repo operations will continue on a weekly basis until end-September 2016.”