BoE: Expect 9-0 for no change in Bank Rate in September - RBS

Research Team at RBS, notes that the BoE’s August MPC Minutes noted that ‘For a majority of Committee members a case could be made for cutting Bank Rate immediately to the effective lower bound.’

Key Quotes

“The reason for not cutting further in August appears to be that the BoE was keen to deliver a ‘broad package of measures’ – perhaps unanimous, or even majority, support could not be reached on a >25bp cut alongside the QE and TFS announcements. Still, the Minutes concluded that ‘there would be further opportunities to assess economic prospects at coming meetings in the light of new data.’ Given our expectations that the economic data will deteriorate – eg, we expect GDP growth to slow to 0.2% q/q in Q3 from 0.6%b q/q in Q2 – we still expect the MPC to err on the side of caution by lowering rates, probably in November 2016.

There was little by way of new information or policy signalling to emerge from the MPC Treasury Select Committee hearing on 7th September. At the margin, the Governor sounded a little more optimistic on the near-term economic outlook, though he is clearly more circumspect than some of the excitable post-Brexit commentary:

‘We expected some bounce-back, there’s been a bit more, but we’re keeping it in perspective. . . Broad-brush, is growth running about half as much as it was prior to the referendum? That’s probably about right given what we know right now.’ (Mark Carney, 7 September 2016)

Whilst survey data since the June 23rd EU referendum have been rather variable – and most surveys tend to be at lower levels than prior to the vote – the influential PMIs rebounded more firmly than expected in August. Although the PMI surveys are among the best leading indicators for the official GDP data, they are by no means infallible.

The surveys are quite effective at capturing trends, but are prone to volatile month-to-month movements. In this regard the sharper-than-expected July decline and August rebound have done little to clarify the outlook – averaging the two leaves the composite PMI at levels which, historically, have been consistent with annualised growth of just 0.3%. Given the extensive monetary policy action taking by the MPC in August, the high-frequency data over the past month or so have probably not been sufficiently poor to prompt a further Bank Rate cut. Dissenting dovish votes are certainly possible (Vlieghe and Haldane), though August’s extensive policy action and the unanimity in July suggests a reduced likelihood of dissenting votes in September – we forecast 9-0 for no change in Bank Rate in September.”