BoE to ease policy but can’t address Brexit uncertainty - MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that after stalling for time last month, the Bank of England is set to announce further monetary easing today in response to the negative hit to the UK economy from the spike higher in uncertainty following the Brexit vote.

Key Quotes

“In the interim period, the BoE has received survey data signalling a sharp loss of economic growth momentum which has supported their own expectations. However, the BoE still has limited hard economic evidence that the UK has slowed sharply at this stage. Still, we expect the BoE to be proactive and ease monetary policy in an attempt to support confidence. Further easing will be justified by a material downward revision to the BoE’s growth outlook highlighting an increased risk of recession. 

The ability of the BoE to support economic growth is more limited in the current environment with yields already at record lows and the BoE appearing reluctant to adopt negative rates. As a result, we expect the BoE to complement a 0.25 percentage point rate cut with other credit easing measures such as expanding the Funding for Lending Scheme, and potentially restarting QE. However, the BoE may want to keep restarting QE in reserve for later when it will have had more hard economic data allowing a better assessment of the UK economy.

The BoE will reiterate as well that the burden for supporting the UK economy falls more heavily on the government following the Brexit vote. The government needs to provide greater clarity over the UK’s future relationship with the EU and the World to help ease heightened uncertainty. The government is also expected to ease fiscal policy modestly later this year to support growth.

The other main channel of support for the UK economy which has helped to ease financial conditions significantly has been the sharp plunge in the pound which has fallen by around 10% since the Brexit vote extending its decline since the summer of last year to just over 15%. We continue to expect the pound to remain at weaker levels seeing no fundamental justification for a sustainable rebound at this stage beyond short term position adjustment. However, it is difficult to see today’s BoE policy action providing a trigger for the pound to weaken further materially.

Market expectations for monetary easing and speculative short pound positions are both high ahead of today’s BoE policy meeting. If the pound doesn’t weaken further today it could encourage some lightening of short pound positions temporarily lifting the pound although any gains are unlikely to be sustained.”