UK: More aggressive BoE triggers GBP selling, but a lot in the price - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the BoE’s MPC acted more aggressively than we expected yesterday with a full array of measures to ensure an easier monetary stance going forward.

Key Quotes

“But when combining the GBP 60bn Gilt buying, with the GBP 10bn corporate bond buying and the GBP 100bn Term Funding Facility, a potential GBP 170bn expansion of the BoE’s balance sheet was committed to yesterday. That then coupled with the 25bp Bank Rate cut with a promise of possibly a further 15bp cut, was enough to see GBP/USD dropping by 1.7% from yesterday’s pre-announcement high. But will there be much follow-through from here? 

The key to describing this as an “exceptional package of measures” as Governor Carney did yesterday is the potential size of the TFS. That measure incorporates the bulk of the balance sheet expansion and we can’t be sure at this stage what the take-up will be. Banks are permitted to refinance borrowings under the Funding for Lending Scheme as the TFS is more attractive. But even still, there may be doubts about the full utilisation of the GBP 100bn. By our estimate, the Bank of England’s balance sheet can potentially go from around 22% of GDP now to a little over 30%. That’s way smaller than the BoJ (currently 80%) and a little smaller than the ECB (currently 28% and rising). The Fed’s balance sheet is static at about 24% of GDP.

Secondly, while the forward guidance of more easing was quite explicit yesterday, it really only amounts to a signal of a further 15bps of easing down to 0.10%. Governor Carney was quite explicit of not wanting to go into negative territory with Bank Rate and that limits the market’s scope for pushing yields lower.

So while we have maintained our GBP/USD year-end forecast of 1.2400 for now, we will certainly have to see a combination of weak economic data – perhaps weaker than what the BoE implies in its forecasts of about flat growth in H2 – and increased financial market volatility and increased risk aversion which would undermine the pound given the UK’s large 7% of GDP current account deficit. Without that combination, the high 1.2000’s rather than the low 1.2000’s might be a more reasonable target for year-end.”