The Bank of England is widely expected to cut interest rates for the first time in seven years this week, in response to a string of data pointing to a sharp economic downturn following the U.K.’s vote to leave the European Union.
After shocking market participants by failing to deliver any policy moves at its July meeting, analysts are now virtually certain Gov. Mark Carney and the bank’s Monetary Policy Committee will deliver some highly anticipated easing measures aimed at countering the Brexit-induced hit to the economy. The central bank will release its rate decision, minutes and quarterly inflation report on Thursday, in what has been dubbed “Super Thursday.”
“Even if they had not fully made up their minds at [the previous meeting], the weakness of the flash [purchasing managers indexes] since that meeting—as well as other evidence from business and consumer confidence surveys—is likely to have sealed the deal. We expect a 25 basis points cut to the bank rate to 0.25%, and measures to support credit to the real economy,” analysts at HSBC said in a note.
The Bank of England hasn’t touched the bank rate since March 2009, when it lowered it to a record-low of 0.5% in the midst of the financial crisis. At the July 14 meeting, analysts were almost convinced the policy makers would move in a bid to support the economy after the surprise Brexit vote on June 23. In the run-up to the referendum, the central bank had warned of grave consequences to the U.K. economy in the event of a “leave” vote, sparking expectations the BOE would immediately jump to the rescue.
However, even as the July minutes referred to “preliminary signs” of a post-Brexit impact on business confidence, the bank pointed out it had no official data on economic activity to warrant a rate cut. Instead, the minutes said “most members of the committee expect monetary policy to be loosened in August,” setting the stage for action this week.
Poor data puts pressure on BOE
Since then, economic indicators have pointed one way: down. Particularly, the purchasing managers index readings have raised concerns, pointing to the steepest pace of contraction in the economy since 2009. The all-sector PMI fell to 47.3 in July from 51.9 in June, its biggest one-month fall in almost 20 years.
“The weak numbers provide powerful arguments for swift policy action to avert the downturn becoming more embedded and help to hopefully play a part in restoring confidence and driving a swift recovery,” said Rob Dobson, senior economist at Markit.
Additionally, a July gauge on consumer confidence dropped the most in 26 years, and some companies have started to announce job cuts because of the Brexit uncertainty.
Add all those factors up and it seems inevitable that the BOE will meet market expectations this time and do some kind of easing. The big question then, is which kind of measures the bank will roll out.
Rate cut 100% priced in
A 25 basis point cut rate to a record low is 100% priced in, while anything steeper is deemed out of the question for now, according to Sam Hill, senior U.K. economist at RBC Capital Markets. By early 2017, the market is priced for a further 10 basis point cut to 0.15%, he added. Rates below zero would be a big surprise, as Carney has signaled negative rates are off the table, in part due to concerns about the impact on bank profitability.
Aside from a rate cut, analysts diverge in their expectations. Many strategists point to a possible extension of the BOE’s funding-for-lending program that aims to encourage banks to boost lending to businesses and households.
There is also speculation the central bank will restart its quantitative easing program and buy between £25 billion ($33 billion) and £50 billion in assets, adding to the £375 billion it has already purchased.
“While we expect an overwhelming majority for policy easing, we also expect individual MPC members to express different views and concerns in the minutes, possibly leading to differences regarding the nature, the timing and the magnitude of the easing,” economists at Barclays said in note.
“That might cause some volatility in the immediate aftermath of the release as market assess the new policy stance,” they added.
Analysts at Danske Bank see the British pound bound for a further selloff against the euro GBPEUR, -0.1422% and dollar GBPUSD, -0.2702% They said the euro EURGBP, +0.1314% could rise to £0.86 over the next month, up from around £0.84 on Thursday, while rallying to as high as £0.90 in six months.
Sterling bought $1.3293 early Thursday, down from $1.3325 late Wednesday in New York.
Forecasting a recession
Aside from the policy statement, the tone of the quarterly inflation report will also be closely gauged on Thursday. It’s the first time the BOE will be able to publicly quantify Brexit’s impact on the economy, which puts policy makers in a tricky situation, said analysts at HSBC.
If the central bank forecasts a recession—as many private economists do—it could be accused of talking down the economy. But if it strikes a more upbeat tone, it opens itself up to charges it had engaged in scaremongering ahead of the Brexit vote.
“Given the early data—most notably the weak flash PMIs for July—we think the bank will forecast a slightly lower than consensus growth number for 2017, possibly including a technical recession,” the HSBC analysts said.
They also think the BOE will lift its inflation forecast because of the steep drop in sterling that makes imports more expensive.
The BOE rate decision, minutes and inflation report at due at noon London time, or 7 a.m. Eastern Time, on Thursday, followed by Carney’s press conference at 12:30 p.m. local time.