Likewise, the MPC did not waver from the terms of its £10bn ($13.2bn, €11.8bn) sterling non-financial investment grade corporate bond purchase programme or its £60bn UK government bond purchase plans.
In light of the fact that several indicators of near-term economic activity have been “somewhat stronger than expected”, including the level of consumer prices inflation in August, the MPC forecast a lesser slowdown in UK GDP during the second half of 2016.
However, the MPC declared its economic outlook following the EU referendum had not changed and a majority of members plan on supporting a further rate cut should the outlook be consistent with the August Inflation Report projections come November. The committee reiterated the lower bound of the rate cut would be “close to, but a little above zero”.
July dip, August bounce
“The Monetary Policy Committee had already cast doubt on the large fall in the July PMIs, so the economy’s bounce back in August should not have come as a surprise to them,” said Royal London Asset Management economist Ian Kernohan. “There is enough evidence to suggest that while the economy may have slowed in Q3, it did not fall into recession, and the MPC note that data has actually been slightly stronger than they expected.”
Kernohan suspects that because the BoE’s forward guidance is more concerned with the UK economy’s longer-term prospects than the short-term economic data, the central bank will follow through with a November rate cut.
“The bank’s view is that the Brexit process will take some time, and will create uncertainties for households and firms, he said. “Specifically, they expect business spending to slow more sharply than consumer spending in response to this uncertainty. In my view, the news since the August Inflation Report should not have impacted this medium term assessment of the UK’s economic prospects, and I expect another rate cut in November.
Like Kernohan, Axa Investment Managers' senior economist David Page also predicts a further rate reduction is in the cards.
“We continue to forecast a 0.15% Bank Rate reduction in November to 0.10%, in keeping with the MPC’s forward guidance. This is likely to be accompanied by an adjustment in the Term Funding Scheme. No guidance has been offered around QE.
"We expect the £60bn QE programme to be extended at its expiry in February. We forecast an eventual rise in the APF to £575bn – a £200bn boost.”
Close eye on inflation
However, Michael Metcalfe head of Global Macro Strategy at State Street Global Markets argues the BoE should be keeping a close eye on inflation, instead of waiting to see whether more quantitative easing measures are necessary.
“Our measure of online UK inflation has now reached 1.8% year-on-year following the Brexit induced sterling collapse. While its minutes show the Bank of England is still willing to wait and see if further easing is needed, should the expected recession not materialise, monetary policy may need to reverse sharply to prevent inflation building,” Metcalfe cautioned.