Bank of England: Further loosening probable - Lloyds Bank

Today the Bank of England (BoE) announced a stimulus package that included a 25bp rate cut, a new Term Lending Scheme and an increase of the asset purchases program. According to analysts from Lloyds Bank further loosening is probable in the months to come.

Key Quotes:

“With some loosening of monetary policy widely trailed in the July MPC minutes – and the BoE having disappointed expectations of easing in July – a 25bp Bank Rate cut was no surprise to either financial markets or most economists. Likewise, the intended objective of the BoE’s Term Funding Scheme – funding for banks at interest rates close to Bank Rate calibrated such that any reduction in Bank Rate does not affect banking sector margins – was largely anticipated, although it came in lieu of a revived Funding for Lending Scheme jointly operated with the Treasury. Expanded asset purchases of gilts and corporate bonds, however, exceeded consensus and our own expectations.”

“In terms of timing, the November Inflation Report seems like a natural point to take stock of the forecasts, and expand stimulus if required.”

“Today’s vigorous stimulus package is particularly notable in 3 ways.  For one, the extent of the MPC’s collective pessimism about the economic outlook appears relatively limited, at least after the supportive measures introduced today. GDP growth throughout 2016 to 2018, on the MPC’s central estimates, is expected to be above post-referendum consensus expectations, and close to the recent optimistic forecasts of the IMF and NIESR, suggesting only a modest downturn.”

“Second, the MPC has not hinted at any increased coordination with fiscal policy. With the fiscal framework from the March Budget publicly dispensed with by PM May, the close proximity of the Autumn Statement to the November Inflation report could have provided the opportunity for a more joined-up policy response.”

“Finally, some on the MPC appear to have a low conviction in a forecast largely made in the absence of hard data. As such, they have been disinclined to risk an excessive policy response, voting against some measures. Nevertheless, with Governor Carney hinting in the course of his press conference that an even deeper cut to Bank Rate could have been carried, the view-based forecast of the internal members seems sufficient to carry through a pro-active policy response, with further loosening probable in the months to come.”