BoE: 25 bps rate cut is highly likely – Commerzbank

Peter Dixon, Research Analyst at Commerzbank, suggests that they argued in H1 2014 that there was a case for a hike in interest rates, if only to signal that the economy was no longer in need of the emergency easing put in place in 2009.

Key Quotes

“Despite the pickup in activity and declining unemployment, the MPC resisted such a move on the grounds of global uncertainty and weak domestic inflation. But this limited its response in the event of an economic shock. Now that a shock has occurred, in the form of the Brexit decision, the BoE will be called into action with fewer heavy weapons at its disposal. A 25 bps rate cut this week is highly likely, but the nearer we approach the zero bound the less effective will rate cuts be. This raises the likelihood that if the economy continues to lose momentum, the BoE will be forced to expand its asset purchases.

Although we do not look for such a move next week, the consensus is split 50-50. Looking further ahead, we suspect that the BoE could well take further action. One reason for doing so is to lengthen the median maturity of the current asset stock, which we calculate has fallen from nine years in 2012 to six years today. An Operation Twist-style policy would serve the purpose of boosting the BoE balance sheet, and thus being seen to be proactive, whilst pushing the problem of how to run it down further out into the future.”