Trading The BoE - Views from 12 Major Banks
What Investment Bankers Think 'The Old Lady' Will Do?
As the Bank of England (BoE) Monetary Policy Committee is set to deliver its first post-Brexit interest rate decision, market analysts are divided on what the central bank is actually about to do.
Interest rate cuts ranging from 10-basis points to 25-basis points are expected with additional measures including a Quantitative Easing extension to be delivered throughout 2016.
We've summed up banks' views on the BoE monetary policy decision, which is due later on Thursday:
- Bank of America Merril Lynch: BoE to cut rates to 10-basis points by August 4 meeting at the latest (close call if all in one go in July, so may split decision) and restart QE possibly as early as August.
- Nomura: BoE to cut rates by 25-basis points in August and November with £125 billion of QE.
- Commerzbank: BoE to cut rates by 25-basis points in Q3.
- Goldman Sachs: 30% chance of a rate cut in July as MPC gives "initial assessment" that further easing is needed. 25-basis points rate cut and £100 billion QE in August.
- Barclays: Cut interest rates by 50-basis points in August with £100/150 billion of QE.
- JP Morgan: 25-basis points rate cut in July & August, signal that QE could be restarted if necessary.
- BNP Paribas: 25-basis points cut in rates in July.
- Citibank: 25-basis points rate cut in July and then QE later in the year if necessary.
- TD Securities: 25-basis points rate cut on Thursday. August's meeting a wildcard: likely that new unconventional policies as well as a possible rate cut/further QE.
- Credit Agricole: 25-basis points cut in July. Another 25-basis points in August, with increased QE.
- Societe Generale: 25-basis points rate cut and £25 billion per quarter at July meeting.
Why The BoE Didn't Cut Today? What's Next?
The most eagerly awaited Bank of England policy decision in years came and went without any change in interest rates or asset purchases. However, there was a strong hint that stimulus measures will be forthcoming at the next meeting on August 4th.
In contrast to consensus expectations for an immediate 25 bp cut, the BoE held its benchmark rate steady at 0.50%. The vote was almost unanimous, with only one member calling for an immediate 25bp reduction. There was also no extension to the BoE’s asset purchase program, meaning that the stock of purchased assets remains at £375bn.
However, it does appear that the Bank of England will loosen policy at its next meeting in early August. The statement mentioned that, based on their initial assessment of the impact of the referendum vote on the economy, “most members” expect monetary policy to be loosened in August. It was also stated that the “precise size and nature” of that stimulus would be determined based on the revised economic projections in the August Inflation Report. That appears to keep the door open to more than just an interest rate cut.
Note that it is common for the Bank of England to wait to make significant policy changes at meetings that are accompanied by an Inflation Report. Also, because of the timing of meetings, the next decision is less than a month away, which also likely played a role in the decision not to rush through stimulus today.
The strong hint that stimulus will be forthcoming at the August meeting means that market reaction to today’s stand-pat vote was initially limited, with sterling settling only marginally higher versus the US$.
BOE's Haldane says monetary policy measures likely to be needed
BOE chief economist and MPC member Andy Haldane with a prepared speech 15 July 2016
- mon pol is part of the collective response to protect economy
- will decide size and extent of stimulus in August
- easing needs to be deliver promptly, muscularly
- overall need to do more to cushion negative shocks
Interestingly the speech was from 30 June in Port Talbot, Welsh steel country, and just been released post-MPC meeting. Title: "Whose recovery?"
Down goes the pound again. GBPUSD 1.3370 EURGBP 0.8330
Got to be loving the two-way. Goes down quicker than it goes up though...
Haldane called for rate cuts a long time before the MPC caught up with the reality.
Very tellingly Haldane highlights the disparity in the UK:
"On subsequent regional visits, including this one in Wales, talking to companies, community groups and charities, I have encountered the same conundrum. For many, the economic recovery is visible and tangible - in sales, in jobs, in investment. But for others it is barely visible and for some non-existent. How to reconcile the macro data with these micro accounts? Were these stories outliers? Or was I neglecting an important missing ingredient in the UK's economic fortunes?
Put differently,whose recovery were we actually talking about?"
Full text here. It's long but well worth a read for those who don't live in the UK and even for some of those who and sit in ivory towers fully cushioned with rose-tinted glasses.
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BofA: BoE to cut; any GBP rebound a selling opportunity
We expect the BoE to cut Bank Rate on Thursday. They have nothing to gain by waiting: better to get ahead of the issue. - We look for 40bp cut, but see a good chance of only 25bp: Carney has said he is concerned about taking rates "too low". We remain bearish GBP and would sell any bounce.
Goldman: Exceptionally dovish minutes; downside GBP risk.
Our UK economist Andrew Benito expects the Bank of England to announce asset purchases worth £100bn at the August 4 meeting, together with a 25bp cut to the policy rate. Further, it is possible that there will be a number of dovish dissents at the July 14 meeting and that the minutes will be exceptionally dovish, so that – to a material degree – August 4 easing could be pre-announced next week. This is why our new forecast front-loads GBP weakness, with GBP/$ at 1.20, 1.21 and 1.25 in 3, 6 and 12 months and EUR/GBP at 0.90, 0.86 and 0.80 over the same time frame.
Credit Suisse: Dovish BoE outcome; GBP rally to be short-lived
The Bank of England's meeting on 14 July is likely to deliver fresh easing moves as hinted by chief Carney, in order to fight the Brexit vote's economic shock. Our economists are more dovish that the wider market, looking for a 45bp rate cut and a resumption of QE to the tune of a GBP 75bio program. Even if this is not delivered this month, our economists feel that the 4 Aug meeting (which will also include a new Inflation Report) will deliver on this front. Typically, dovish surprises are negative for currencies. And given how negative real rates in the UK are likely to be in the next year (Figure 1), there seems no reason to expect otherwise in this case
Morgan Stanley: BoE to cut; GBP remains a sell.
We expect the BoE to cut rates by 25bp on Thursday. We think the GBP rally will run out of steam once investors learn that the economy is likely to slow down from the investment side, weakening employment and then finally consumption. Yesterday’s upbeat headlines suggesting strong post Brexit retail demand provided the excuse for a sharp GBP short-covering rally, but the trend remains down. Note that we believe it is too early to make consumption related judgements from so few data points.
SEB: On hold with an expansion of AFP targets.
We expect the BoE to stay on hold and to announce an expansion of the AFP target to GBP450bn. Purchases will target commercial papers and corporate bonds to lower the liquidity risk premium and offload some credit risk from banks balance sheets.
BNPP: BoE to cut; premature to buy GBP:
The focus will quickly shift to the Bank of England, with our economists expecting a rate cut on Thursday of this week. BOE Governor Carney confirmed that he views the weaker GBP as an important adjustment mechanism in the aftermath of the vote. Bottom line is we continue to view long GBP positions as premature and expect renewed weakness in the weeks ahead. We now see GBPUSD at 1.28 end Q3 16 (EURGBP 0.86), 1.33 end Q4 16 (EURGBP 0.84) and 1.37 end Q4 17 1.37 (EURGBP 0.77).
ABN.AMRO: BoE to cut rates and re-launch its asset purchase programme.
We expect the BoE to cut its Bank Rate by 25bp taking it to 0.25% from 0.5%. The UK economy had been slowing already before the UK's vote to leave the EU and early surveys following the referendum suggest there has been a major hit to business and consumer confidence. Indeed, it looks likely that the UK economy is heading for a recession. Although the sharp fall in sterling will push headline inflation above the BoE's 2% inflation target early next year, we expect the BoE to put more weight on the weakness in the economy. This is because the impact of the fall in sterling on inflation will eventually dissipate and the medium to long-run outlook for inflation will be determined by the economic outlook, which has deteriorated sharply. We expect the BoE to follow up with additional monetary easing next month. By then it will have more information on the early hit to the economy from the Brexit vote, and it will publish its new forecasts for growth and inflation and the risks surrounding them. We expect the BoE to re-launch its asset purchase programme in August. The bulk of the buys will once again be gilts, however we think the BoE could also include riskier assets, such as credits. The BoE could also enhance its Funding for Lending programme by making the borrowing conditions for commercial banks more attractive.
Barclays: Some upside GBP risk on an unchanged BoE.
If our forecasts for no change in BoE policy materialise this Thursday, the GBP may find some temporary support, given that interest rate markets imply about a 70% chance of a 25bp Bank Rate cut and the median analyst surveyed by Bloomberg expects a 25bp rate cut. The statement and minutes, however, should be decidedly dovish, with Gertjan Vlieghe and Andy Haldane likely to vote for a rate cut, encouraging our view of policy easing at the 4 August meeting.
Danske: A precautionary 25bp cut but no aggressive easing.
We expect the BoE to make a precautionary 25bp cut from 0.50% to 0.25% and at the same time communicate that more easing could come. We think the BoE will communicate that the weaker GBP would only push inflation above its target temporarily, as was the case during the financial crisis. While analysts are split on whether the BoE will cut by 25bp in July or stay on hold, markets have priced in an 80% probability of a cut in July. They have priced in approximately 1.5 cuts by year end. The reason we do not expect more aggressive easing in July is that Carney said that the BoE will make an ‘initial assessment’ in July and the ‘full assessment’ in August, when the next Inflation Report including new economic projections is due out. Carney has also said he considers the July and August meetings to be a ‘package’ and that the BoE will ‘discuss further the range of instruments at our disposal’ in August. It is worth noting that at the BoE press conference in May, Carney said that a Brexit could lead to a UK recession – implying that the UK economy needs more than just one rate cut to support the economy. The fact that the BoE lowered the countercyclical capital buffer from 0.50% to 0.00% so soon after the UK’s EU vote was also a signal that the BoE will be aggressive, in our view. We expect it to cut the Bank Rate down to 0.00% in August and possibly ease using unconventional tools when the full assessment of Brexit is made. We think the BoE will resume buying assets under its Asset Purchase Facility (APF) but it could also use its Funding for Lending Scheme (FLS) in order to boost lending to the real economy.
RBS: BoE to cut 25bp this week and another 25bp in August.
With a 75% probability of a 25bp cut from the Bank of England priced-in for July, RBS economist Ross Walker believes failure to deliver would risk unnecessarily undermining market confidence. His expectation is that a 25bp cut in July would be followed by another quarter-point reduction in August, taking Bank Rate to its floor. Subsequent, or parallel, BoE policy action would include further measures to support the flow of credit to the real economy and a resumption of QE gilt purchases around November. The MPC might prefer to wait for the detailed August forecast round before sanctioning lower rates, but it is not obvious that there would be significantly more information by that point (a scattering of post-referendum surveys). The BoE was more aggressive and decisive during the financial crisis of 2008-09. That episode probably provides the playbook for the reaction function this time. With Bank Rate swaps rate largely priced by the August, GBP reaction looks dependent on what the MPC signals about the path of policy beyond this week’s meeting. We see further sterling weakness ahead.
Nordea: Some BoE policy easing this week, some later.
We think there is enough evidence to ease policy next Thursday. But the BoE will also want to keep some powder dry for later. By nature, there cannot be a lot of macro evidence about the fallout of the UK referendum just 2½ weeks after the event. But beyond the signs of stress in the commercial property sector and plenty of micro evidence for slower activity, there is also the first macro evidence. Consumer confidence dropped sharply in early July, and it’s probably not a one off. Moreover, the National Institute of Economic and Social Research estimates that output shrank already in May and June, and it can only be worse in July.So the UK economy could be at the brink of a recession even if GDP data will tell us so only later this year. The BoE cannot prevent a recession from happening, but it can try to cushion it by easing monetary policy despite the increase in inflation that is likely to happen due to the weaker GBP. Policy makers are probably not too concerned about a weaker pound as it will support export growth. We expect an increase in the QE programme, our estimate being by GBP 50bn, raising the stock to GBP 425bn. Beyond Gilts, corporate bonds will probably also be included as an attempt to prevent a tightening of credit conditions. The Bank of England’s decision to lower the countercyclical capital buffer for UK banks to zero can also be seen as part of accredit easing policy. A further increase in QE could follow later this year.
Credit Agricole: BoE to cut but limited GBP downside.
We remain bearish and do not exclude that the currency will face further downside risks from the current levels. A combination of strongly capped central banks, a weaker eected capital flow situation and intact political uncertainty are likely to keep sentiment muted. However, with many negatives in the price already, momentum is likely to ease. The focus will be on the BoE monetary policy announcement. Crédit Agricole CIB economists are expecting a 25bp cut and a signal of further easing ahead. This is consistent with the recent pricing in the rates markets, which suggest that investors are attaching a 75% chance to a 25bp cut. In addition, markets are attaching about 80% chance that rates will be lowered to zero before year-end. Given the rates market pricing, we believe that the BoE’s language about the aggressiveness and the type of future easing that will likely attract market attention. We believe that investors expecting forceful, pre-emptive easing by the MPC may be disappointed. Hence, our less aggressive GBP stance for the weeks to come.
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