Cuts to Bank Rate and asset purchases likely to be expected in August - EY ITEM Club comments

14 July 2016

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  • MPC surprises with no change in rates
  • A majority of members expect policy to be loosened in August.

Martin Beck, senior economic advisor to the EY ITEM Club, comments:
“The MPC has chosen to wait until the post-referendum dust has settled before deciding whether to loosen monetary policy. Mark Carney will now no doubt be subject to more ‘unreliable boyfriend’ criticisms. But in fairness to the Governor, his speech on 30 June had indicated that policy easing would be needed ‘over the summer’, not specifically July.

“July’s minutes clearly signal that “most members of the Committee expect monetary policy to be loosened in August.” This raises the question why, if the MPC judges that the economy will need support from a loosening of monetary policy in three weeks’ time, it did not arrive at the same judgement now.

“The only likely reason for this delay is the absence of data relating to the post-referendum period. However, this drawback will have seen little improvement by 4 August, with the CIPS activity surveys for July becoming available, but precious little else.

“Notwithstanding some reservations proffered by July’s minutes, our view remains that the MPC’s next meeting will include a cut in borrowing costs in August’s meeting. However, the Committee’s discussion of a possible ‘package of measures’ points to other monetary levers also taking the strain. A reduction in Bank Rate to 0.25% alongside perhaps £75bn of asset purchases seems realistic.”