BoE on track for easing in August - TDS

James Rossiter, Senior Global Strategist at TDS, suggests that despite some speculation in markets that the BoE might under-deliver at their August policy meeting, we think that the economy is now showing signs that it needs help.

Key Quotes

“The MPC is clearly split over the appropriate timing and degree of stimulus required, but the majority of the committee is likely to support easing next month.

There is scant post-Brexit data available so far, but what we have seen suggests a marked slowdown in the UK economy in 16Q3.

Deterioration in the data

Early readings of July data should cement the need for policy action in August amongst most members of the committee. Today’s PMIs show an economy that has slowed dramatically, and are consistent with growth of -0.4% in 16Q3, marking what could be the first quarter of a mild recession (our base case). Confidence data has also deteriorated significantly, though it does remain at a reasonably high level. And the sustainability of the housing market remains a big concern. The true extent of the downturn, however, will not be revealed until later this summer and into the autumn as “hard data” is released.

Uncertainties on the Policy “Package”

While we’re comfortable with our expectations of an easing package in August, there is admittedly a huge degree of uncertainty over the composition and timing of the policy move. Our base case calls for a 25bps reduction in Bank Rate, coupled with some non-conventional stimulus in the form of QE, corporate asset purchases, and likely an expansion of the FLS.

However, this is unlikely to be enough stimulus for an economy heading into a dark third quarter. We therefore expect the MPC to follow up its August package with another similar package, likely in November, taking Bank Rate to zero (or close to it), and boosting QE further. By year-end, we should see Bank Rate at zero and around £75-125bn of QE launched, with more to come as required.”