Post BoE thoughts - August easing clearly on the cards, but 'unreliable boyfriend' strikes again
Eminently no change in policy, by a very decisive 8-1 vote, was clearly a surprise. As noted in the preview, the case for any move was very tenuous, given the short period of time since the referendum, and a clear need to establish what the initial fall-out for the economy will prove to be. As the paragraphs from the minutes below highlight, some form of easing will be forthcoming at the 4 August meeting, though it is not assured that this will include a base rate cut. That said, numerous BoE MPC speakers have noted in in recent months that 0.50% is no longer the lower bound for rates that they had previously been assumed, therefore non-delivery of a rate cut would need to be properly stage managed. Indeed that is perhaps the key point, today's decision was the right one, but once again a central bank has failed to properly manage expectations, which is all the more disappointing given the turmoil and uncertainty that the UK has been enduring since 24 June. Eminently the BoE could offer the defence that the long-term repos and the decision to cut banks' countercyclical capital buffer need to be seen as part of the package of measures over the summer months. However it would not have been a tall order to also emphasize that further measures would require a somewhat clearer picture on where pressure points are emerging in the economy and financial sector, which at the very earliest would be at next month's Inflation report meeting. The criticism is all the more justified given Carney's barrage of criticism of the political fraternity at that press conference two weeks ago. Given that the new Chancellor emphasized that major transport infrastructure spending will form a key part of the Treasury's efforts to bolster the economy against the headwinds from the Brexit decision, Mr Carney and his MPC colleagues would be well advised to take a leaf out of the Bank of Canada's 'wait and see' approach with regards to fiscal policy. The MPC can be thankful that the combination of the unexpectedly swift installation of a new Prime Minister, and the chatter around 'helicopter money' in Japan had cleared out a considerable volume of positioning, above all GBP related, ahead of today's 'surprise', thus enabling a less exaggerated level of reactive market volatility. But such good fortune should not be taken as a sign that markets genuinely took the decision in their stride.
** Key paragraphs on policy outlook from July MPC minutes
(see also:
http://www.bankofengland.co.uk/publications/minutes/Documents/mpc/pdf/2016/jul.pdf)
35 The MPC was committed to taking whatever action was needed to support growth and to return inflation to the target over an appropriate horizon. To that end, most members of the Committee expected monetary policy to be loosened in August.
36 The Committee reviewed a range of possible stimulus measures and combinations thereof. It considered the potential interaction between various measures and the financial system, and therefore their influence on output and inflation. Committee members had an initial exchange of views on various possible packages of measures.
37 The exact extent of any additional stimulus measures would be based on the Committee’s updated forecast. Their composition would take account of any interactions with the financial system and their effectiveness in supporting the domestic economy. Further detailed analysis across all policy areas of the Bank would be required.
..........................................................................
Marc Ostwald
Strategist