BoE likely to cut rates by at least 25 bps, says BofA Merrill Lynch

The Bank of England is likely to cut interest rates by at least 25 basis points on Thursday, according to Bank of America Merrill Lynch, which said the BoE has nothing to gain by waiting.

ML said it was looking for a 40 basis points cut, but sees a good change of only 25 basis points, noting that Carney has said he is concerned about taking rates “too low”. Still, BofA ML said it was hard to tell how low was “too low”.

“Rate setters have already recognised Brexit as a bad economic shock. Plenty of data confirm that view. Mark Carney said easing would probably be required. Even if no data were available, we believe the right action would be to cut: just in case.

“That is zerobound economics: the BoE can hike in the future if it is wrong, but making up for delaying is difficult: ask the ECB. We hear a lot that the BoE may ‘save its bullets’. We disagree. If one sees a waterfall downstream, better to start paddling now in case it is a big waterfall. By the time one gets to the edge it may be too late.”

Merrill reckoned the BoE will do all its conventional policy in one go. As for the unconventional policy, it expects the Bank to unleash this at the August policy meeting.

It looks for £50bn additional quantitative easing, potentially including private-sector assets and a reboot of the funding for lending scheme.

ML said the UK’s decision to leave the EU will likely hurt the economy in the short and long run.

“In the long run because of the likely worse trading terms with the EU the UK will probably end up with, and in the short term because of the uncertainty over that long-term path.”

Merrill said it was important to remember the uncertainty firms and consumers face is about how bad the fallout might be, not whether it is good or bad.

“In short, Brexit is a bad economic shock in our view. Markets seem to think it is a bad shock: sterling and gilt yields have fallen sharply. The BoE is on the record saying it would mean slower growth and the data we have seen so far support this view.”

The bank said it remains bearish GBP and would sell any bounce in the currency.