Thursday preview: BoE widely expected to cut interest rates

Last month the Bank shocked the market by keeping interest rates unchanged. At the time, the BoE said it was waiting on more economic data to assess the impact of Brexit but indicated that policy action was likely in August.

With more information now at hand, many analysts see the Bank cutting interest rates by 25 basis points (bps).

The August Quarterly Inflation Report, which will be released alongside the policy announcement, will provide an update on the outlook for the UK’s economy post Brexit.

Bank of America Merill Lynch said the case for BoE stimulus “is clear” as the recent flow of dismal economic data shows an economy that has taken a “big hit”. This week has seen a raft of weak purchasing managers’ index reports on UK manufacturing, construction and services in July, adding to bets the Bank will take action on Thursday.

Merill Lynch expects a 25bps point cut to interest rates along with £50bn quantitative easing and credit easing.

“The BoE should throw the kitchen sink at the problem: the worst thing that could happen now is the stimulus does not work, so better to do too much,” Merill Lynch said.

“Dismal data since the BoE’s last policy meeting (which rate setters seemed not to expect) and Monetary Policy Committee member Martin Weale’s dovish flip-flop suggest less risk of disappointment.”

Weale, an independent member of the Bank’s MPC, last week told the Financial Times he favours immediate stimulus for the economy to fight a post EU-referendum downturn. His remarks came a week after urging the BoE to wait for firmer evidence before cutting rates or expanding its quantitative easing programme.

Meanwhile, Merrill Lynch said it believes policymakers will have to cut growth forecasts heavily in the Inflation Report and highlight the downside risks. However, the bank does not expect the BoE to forecast a recession.

Merrill Lynch noted that much of the hard data for July will not be released until August so the BoE will not know the full extent of Brexit’s impact on the economy.

However, it said the BoE cannot wait that long before acting given the sharp falls across a wide range of soft data, including PMIs.

“At this stage, all the BoE knows is that the economy has taken a bad hit, uncertainty is high and downside risks are large.

“It cannot finely calibrate a policy response to that. So the name of the game is risk management: act early, act aggressively.”

Thursday 4 August



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INTERNATIONAL ECONOMIC ANNOUNCEMENTS

Continuing Claims (US) (13:30)

Factory Orders (US) (13:30)

Initial Jobless Claims (US) (13:30)



Q2

Inmarsat, Nokia OYJ



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TRADING ANNOUNCEMENTS

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UK ECONOMIC ANNOUNCEMENTS

BoE Inflation Report (12:00)

BoE Interest Rate Decision (12:00)

BoE Interest Rate Minutes (12:00)



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Mitie Group



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