Market view: Base rate cut and further QE in November
The Monetary Policy Committee voted today (2 August) to keep base rate at 0.5 per cent, and did not increase the quantitative easing programme.
It is only a month since the MPC resumed its QE programme, so no action was likely at today’s meeting although analysts had predicted a further base rate cut to 0.25 per cent which did not materialise.
However, Capital Economics expects both an interest rate cut and a further extension of the asset purchase programme before the end of the year.
The £50bn of extra gilt purchases announced at July’s meeting will be spread over the next four months. Barring a dramatic turn in the economy in either direction, the next few policy meetings are therefore likely to be uneventful, the analyst said.
Vicky Redwood, chief UK economist at Capital Economics, said: “We expect this month’s vote to leave the QE programme at £375bn to have been unanimous.
“Nonetheless, we think that next Wednesday’s Inflation report will leave the door open to more stimulus further ahead. Both the growth and inflation forecasts are set to be revised down substantially.”
Inflation has now dropped to 2.4 per cent and Ms Redwood believes that by November’s meeting, the latest figures will show inflation at close to just 1 per cent, half the 2 per cent target.
Ms Redwood said: “At some point the Bank will probably widen the scope of its purchases. But for now, our best guess is that the Committee will stick with buying gilts and will announce another £50bn of purchases in November. We also expect a further cut in bank rate in November.
“Of course, the MPC could cut rates instead of increasing QE. But the Committee would probably view the two measures as complementary – in much the same way as it saw the Funding for Lending Scheme and additional QE as enhancing each other. We expect a rate cut to 0.25 per cent, as is broadly priced into the markets. But a bigger reduction to just 0.1 per cent or so is possible.”
However, Andrew McPhillips, chief economist at Yorkshire Building Society, does not believe there is a “convincing case” to support a base rate cut.
He said: “And the minutes of the meeting in July indicated that the MPC would wait to see what impact the Funding for Lending Scheme has before reconsidering the current stance on a rate cut.
“Unless there are any major negative impacts in the next three months, such as a country leaving the euro for example, the MPC are likely to wait for the completion of the latest expansion of QE and the introduction of FLS to have an impact before making any further changes to monetary policy.”
Azad Zangana, European Economist at Schroders, added : “The Bank of England will publish its updated forecast fan-charts for growth and inflation next week in its Inflation Report, which will provide markets a signal of the prospects for more quantitative easing, or even a further cut in interest rates, as has been called for by the IMF.
“However, we expect the Bank of England to remain in ‘wait and see’ mode, especially as it will want to assess the impact of the government’s ‘Funding for Lending Scheme’, which started yesterday.”