The BoE’s decision to sit on its hands was a surprise to us and financial markets. We expected a 25bp reduction. Before the decision markets priced in a roughly 80% chance of a 25bp reduction. The MPC voted 8-1 to hold rates (dove Vlieghe wanted a 25bp cut) and 9-0 to keep the target for asset purchases unchanged. Nevertheless the statement was clear that stimulus was just a matter of time, noting that most MPC members expected ‘loosening in August’.
The minutes recorded that members discussed various options or combination of options to step up monetary easing. It seems that most MPC members want to consider the new forecasts for growth and inflation as part of the August Inflation Report so that they can better decide on the appropriate degree and type of monetary stimulus.
We think that aggressive monetary stimulus remains very likely next month. We expect (a) a 25bp reduction in Bank Rate (b) the launch of an GBP 150bn purchase programme taking total target to 525bn to be carried out between September 2016 and June 2017 – mostly gilts but also including credits with monthly purchases averaging 15bn (c) an easing of borrowing conditions for banks in its Funding for Lending Programme