Bank of England owns today - BBH

Research Team at BBH, suggests that the Bank of England owns today, though tomorrow will be about the US jobs report.  

Key Quotes

“The BOE disappointed the market last month by not immediately responding to the UK referendum.  It had laid out a somber economic and financial scenario as a risk case if the UK chose to leave the EU.  At the time, and even after the referendum, some accused Carney of being too partisan.

The Bank of England Governor did seem to be exaggerating when he claimed that the UK economy was slowing in the spring due to holding the referendum in the first place.  We have subsequently seen the preliminary estimate of Q2 GDP which shows that economy activity had increased a little over Q1.

However, what that risk scenario that the BOE is presented is now more or less the base case.  The forecasts will be updated today, but the sobering surveys (PMI and CBI) and NISER projections are fairly consistent with what the BOE had anticipated.  There must be some calibration between the forecasts, even given a confidence interval around them, and the actions the BOE takes or suggests it can take.

That said, the inflationary pass-through of sterling's depreciation (import and consumer prices) is unlikely to deter significant action.  The impact from sterling is temporary and price pressures are beginning (when the Brexit shock hit) at just above zero.  

In terms of policy, there are three elements.  First is the base rate itself.  It stands at 50 bp.  The failure to cut it would be a major disappointment to the market at this juncture.  Most look for a 25 bp cut.  In the past, Carney (though perhaps it is also an institutional judgment) has shown a reluctance to cut rates too close to zero, let alone negative interest rates.  There are some calls for a larger than 25 bp cut; we suspect the BOE is not persuaded that the additional marginal rate cut will have much impact.

Second are asset purchases.  The market is nearly split on whether the BOE announces a new asset purchase program (QE).  Those that do expect QE are mostly anticipating a GBP50-GBP75 bln program over several months.  There has been some talk that the BOE could buy corporate bonds.  Here too we think the odds do not favor innovation when it is not necessary.

Third is a funding-for-lending scheme (FLS).  This facility provides long-term funding to banks and building societies.  The amount and rate is linked to their actual lending.  The program has been in existence since 2012 and has repeatedly been renewed, most recently late last year.  Currently, borrowing is allowed until January 2018.  This program may be broadened.  If it is not, it would not be a significant disappointment.

Some easing by the BOE has been well telegraphed.  To get the most impact from today's decision may require that market participants are given the impression that the BOE is prepared to do more, that it has not exhausted monetary policy.  That might translate into holding back.  Perhaps it could intimate that it can renew asset purchases, but stopping short of launching a program now.  

Arguably (and this is what the shadow MPC at The Times argued), the economic fallout from the referendum is not something that monetary policy can address when interest rates are already low.  This might be a job better performed by fiscal policy.  It may be more a question of political will than a technocrat turning of a dial or pulling a switch.  

We suspect there is a greater risk that the market is disappointed or that there is a sell the rumor buy the fact type of activity if the BOE surprises the market with its aggressiveness.   Sterling rose to around $1.3370 yesterday, and this could be retested today.  A move above there will target the $1.35 area, which is technically significant.  A trendline drawn off the lows comes in near $1.3160 today.  Also, we note, that the bookmakers in London have tightened the odds that Article 50 is not triggered until 2018 or later.”