BoE leaves rates unchanged - ING

James Knightley,Senior Economist at ING, notes that the Bank of England left monetary policy unchanged today, something of a surprise given Mark Carney has suggested he thought the direction of policy was heading towards easing.

Key Quotes

“Admittedly he did suggest the July meeting would just be used to make an initial assessment, with a fuller more detailed examination due in August.

In terms of their early views, the BoE believe that the “Brexit decision “has affected sentiment among households and companies”, while the Bank’s Agents suggest “some businesses are beginning to delay investment projects and postpone recruitment decisions”. As for the housing market, “survey data point to a significant weakening in expected activity”. This was enough for one member, Gertjan Vlieghe, to vote for an immediate rate cut. However, the other eight committee members felt stable policy was warranted given the lack of data and relatively contained financial market moves. Nonetheless, “most members of the Committee expect monetary policy to be loosened in August.”

The MPC should have a slightly clearer picture of the balance of probabilities for the path of the economy at that meeting – they will have updated forecasts – and this can give them cover to justify action. We look for a 25bp rate cut but we would suspect that quantitative easing and further credit easing initiatives are also likely. Sceptics may argue that QE merely boosts asset prices with the benefits skewed towards the wealthy, but the Bank of England working paper 542 argued that the BoE’s QE2 did generate meaningful improvements.

The authors estimated that “the second round of the Bank’s QE purchases during 2011–12 (£175bn) and the initial phase of the FLS each boosted GDP in the United Kingdom by around 0.5%–0.8%. Their effect on inflation was also broadly positive reaching around 0.6 percentage points, at its peak.” We predict that QE will eventually be increased by another £125bn – to £500bn in total, although the initial announcement in August may be a more modest £50bn.”