Super Dovish BoE Back With A Vengeance; More Cuts Ahead - SEB

After disappointing markets in July a unanimous governing council delivered well above market expectations today by delivering a 25bps rate cut (in line with market expectations) and expanding the QE program by totally 70bn (60bn government bonds and 10bn corporate bonds). The consensus forecast was for the QE program to be left unchanged, although a large minority predicted an expansion, in many cases even larger that was delivered. The strong market reaction on the announcement was also due to the strong signals of another rate cut (to slightly above zero) later this year is if the economy develops in line with the forecast in the Inflation report.

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To make it easier for banks to pass the lower interest rates on to households and corporations the BOE will also introduce a Term-Funding Scheme for banks (amounting to up to £100bn ) which will provide cheap funding to the banks at an interest rate close to the bank rate. BOE says that it will purchase investment grade corporate bonds issued by companies making a “material contribution to the UK economy”.  One member of the governing council entered a reservation against buying corporate bonds, while two additional members made reservations against government bond buying..

Partly as an effect of the monetary expansion and earlier Sterling weakening after the Brexit vote the inflation rate is predicted to increase to around 2.5% in the medium term, indicating that the governing council will be very tolerant to any inflation impulse created by the depreciating exchange rate. We predict the BOE will continue to cut the bank rate by another 20bps (to 0.05%), most likely in November, when the next inflation report will be presented.