BofA doesn't expect BoE to ease even if Brexit news is negative
Britain and the European Union will most likely agree a Brexit deal, but should they fail, then the Bank of England would restart its asset purchases and cut interest rates, by 50 basis points eventually, economists at Bank of America said.
However, any policy changes would not come until February's meeting of the Monetary Policy Committee - not during the following week's - if at all.
"To be clear, our base case is a Brexit deal, no acceleration of QE purchases and no change in Bank Rate. In a No Deal Brexit scenario we would expect Bank Rate cut, eventually, to -50bp with the first step, likely marginally into negative territory, in February," they said.
In any case, the fact was that Bank's medium-term economic forecasts were too rosy because they did not take into account Britons' desire to set aside some extra savings - just in case - nor the need to deleverage in the wake of the pandemic, BofA said.
That was true even if Bank cut Bank Rate by 10 basis points in the first quarter of 2021, as financial markets were already discounting.
Yes, there were upside risks as well, but they were "vastly dominated to the downside".
"At a minimum the BoE needs to keep the market pricing 10bp of rate cuts, which means keeping a rate cut live. When it finishes the negative rates review we expect the BoE to conclude that the effective lower bound for Bank Rate is negative," the economists added.
Markets were also being too upbeat about growth prospects, BofA said, and when that became clear, pressure would grow to add further stimulus with yield curve control probably making more sense, although it might not be the first measure adopted.
"Once the longer-term challenge becomes visible, with output likely still a sizeable way below trend (we think 3% below 4Q 2019 levels at end-2021), the question will be how to add more. Bank Rate and [Term Funding Scheme] rate cuts would, we think, be the first port of call if Michael Saunders recent speech is any guide."