How to trade the August BOE interest rate decision
Why the Bank of England Might Hold Back
This week’s downbeat PMIs certainly mean it’s almost certain that the Bank of England will act to loosen monetary policy. A 25 basis point cut to interest rates is priced in, but will the Bank go the whole hog?
It’s far from clear if the MPC will go any further than this and there is every chance that it might keep something back for later in the year.
While the base case is certainly for additional stimulus, there are perhaps three reasons to hold back a little.
Diminishing returns from loose monetary policy – evidence from Europe and Japan suggests you cannot keep cutting rates and expect for economic magic to happen. You can boost supply by easing credit conditions but where is the demand? Hamstrung by low rates there is little incentive for banks to lend without taking on more risk than they’d like to. A 25 basis point cut isn’t going to unleash Britain’s pent-up economic potential or get firms investing much more than they are already.
Fiscal stimulus – has Mark Carney discussed this with new chancellor Philip Hammond? As central banks run out of ammunition the torch is being passed to governments to stimulate demand - at long last some would say. Japan has set the wheels in motion – the UK could be next.
Hammond has already said he could “reset” fiscal policy in the Autumn Statement and Brexit has offered the Conservative government a chance to open the spending taps. This is still politically difficult – no more living within our means – but it’s got to be on the cards, particularly as the government can borrow for almost nothing.
Thirdly, while the PMI readings have been abysmal, it is important to remember they show only one month of survey data and the latest GDP figures were impressive, showing a 0.6% year-on-year increase in the second quarter. Markit’s data shows cost pressures hit a three-month high – hardly a sign that inflation is exploding. If confidence rebounds in August and a contraction in the third quarter avoided, overly-aggressive stimulus now would look too hasty.
More easing for sure, but the Bank might just want to keep the bazooka in the locker for now
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What are the key levels through the risk event
Tomorrow, the BOE will announce there interest rate decision. The expectations is for a cut of 25 basis points to 0.25%. What do they say in the statement? Do they do more QE? Do they surprise and say they don't have enough information yet?
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