BoE Preview: Pushing the button – ING

Research Team at ING, suggests that the degree of BoE dovishness is the key to GBP’s reaction.

Key Quotes

“With the UK economy facing downside growth risks, the BoE looks set to react with more policy stimulus this week. Governor Carney once again signalled that the Bank has the tools to respond to economic developments at yesterday’s testimony to UK lawmakers. That tool box looks set to be re-opened tomorrow; we think the BoE will react to downside economic risks generated by Brexit uncertainty with a 25bp rate cut.

So far we have had little economic data to go on regarding how the economy has developed since the EU referendum.

BoE action this week remains a close call, we narrowly favour a rate cut. We acknowledge that a BoE rate cut as early as this week is a close call; the fact that some political uncertainty has been cleared, with Theresa May set to become the new Prime Minister later today, means that it isn’t quite guaranteed. Nonetheless, the Bank has been keen to take action post-Brexit to shore up confidence and thus we believe the MPC will press ahead with a rate cut today.

Look for strong dovish signals that further easing is on the horizon. One 25bp cut is unlikely to turn the economy around and prevent a likely technical recession in 1H17. We expect a sizeable expansion of quantitative easing (QE) at the Aug MPC meeting, most likely an increase of £125bn (taking the total stock of asset purchases to £500bn). We also suspect the BoE will work with the Treasury to restart the Funding for Lending Scheme (FLS), while ING’s base case is for the Bank rate to end the year at 0%.

With markets now pricing in an 80% chance of a 25bp rate cut at today’s meeting, the risks of a BoE disappointment have increased. Should the MPC keep rates on hold for now, the knee-jerk reaction could see GBP squeeze even higher. Yet, we think any rebound in GBP/USD may be limited to the 1.3350-1.3500 area for three reasons:

i. BoE easing expectations have accounted for ≈2-3% of the post-Brexit move lower in cable, with price action being largely driven by heightened GBP risk premia.

ii. A lack of short builds in the CFTC positioning data implies that real money investors may be behind the recent GBP selling (as opposed to speculative trades);

iii. Dovish forward guidance in the statement/minutes is likely to signal that rate cuts (and QE) are on the horizon, limiting the scope for a retrace in short-term UK rates.

A dovish BoE surprise cannot be ruled out. Ahead of the actual announcement in Mar 2009, the BoE sent a strong signal that QE asset purchases were likely via the Feb Inflation Report. We expect to see something similar in this week’s statement/minutes. Although we may not receive any technical details, our Debt Strategy team note that at its peak, the Bank were purchasing close to £30bn gilts per month. Hence, if the MPC opt to go down this route, we suspect that the BoE could purchase ≈£25bn assets per month into year-end (of which £500m-£1bn may comprise of private sector assets). QE talk this week could see a bull flattening of the UK curve and weigh on GBP.

Medium-term uncertainties lie ahead, fade any GBP move higher. Our base case of a 25bp cut and strong dovish BoE signals should see GBP/USD fall back to 1.2900.”