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No change from the BoE…yet

14 July 2016 by Eoin Walsh

The BoE has today released their Base Rate and Asset Purchase decisions, electing to keep both unchanged – indeed the voting was not even close, with just 1 vote for a rate cut and a unanimous decision to keep the Asset Purchase Target at £375bn.  This was against the market consensus, and indeed ours, both having predicted a 25bps rate cut.

However, the Monetary Policy did make for some interesting reading and despite highlighting that markets had reacted well to the Brexit vote, thanks to the “improved resilience of the core of the UK financial system and the flexibility of the regulatory framework”, the report had an obviously dovish tone.

The report stated that while the markets were responding well to the Brexit vote, the MPC were content to wait for official data on economic activity before acting. It also emphasised that inflation was very likely to be impacted by the vote and that they would publish new forecasts in the 4th August Inflation Report, the same date as the next Base Rate and QE decision.  Consumer confidence and household and company sentiment were highlighted, unsurprisingly, and the report noted that there were early signs of sentiment having been negatively impacted, with sharp falls in some confidence measures, which were leading to delays in investment projects and postponements of recruitment decisions.

Overall, the report seemed very sensible and measured.  The BoE wants official data to support the early evidence that Brexit has negatively impacted the economy, and if this proves to be the case, they stand ready to act.  We commented on the availability of and demand for credit yesterday and this is obviously very important.  Just because credit is available, it doesn’t mean that businesses will invest unless they have the confidence to do so.  The BoE will be on the lookout for any tightening of financial conditions and will act accordingly. Indeed the report concluded by saying that the MPC was very focused on growth and returning inflation to the target and “To that end, most members of the Committee expect monetary policy to be loosened in August”.

What shape this action will take remains to be seen, obvious options include a cut to the base rate, further QE measures and outright corporate bond purchases, similar to the ECB. The measures were already being predicted by some market commentators for this meeting, and indeed its an activity conducted by the BoE many years ago, so it would not be a new policy for them.

We continue to think a rate cut is likely and should credit conditions tighten, or business confidence be adversely impacted further, then specific policies to address this are also highly likely.

There is plenty of data to influence the decision between now and the 4th August – so much for a quiet summer for the credit markets!

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