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Aug 4, 2016

Bloomberg View - August4, 2016: What to Watch as Carney Kicks Off Defense Against Brexit Fallout, by

Lucy Meakin Jill Ward 

It’s the most hotly anticipated Bank of England decision since, well, three weeks ago.

Back then officials surprised investors by keeping rates unchanged and signaled they’d instead loosen this month. All will be revealed on Thursday at noon, when Governor Mark Carney and the Monetary Policy Committee publish their first full assessment of what the Brexit vote means for the economy and their defensive plan. Almost all economists in a Bloomberg survey say the benchmark rate will be reduced to a record low and most predict other measures as well.
So what’s changed? Since the central bank’s July meeting, a growing body of reports point to slumping growth. Markit said its index of services, the largest part of the economy, fell to the weakest in seven years last month and its three industry surveys combined suggest a 0.4 percent contraction this quarter.
VIDEO: Here’s what you need to know on "Super Thursday"
The drop in those surveys alone may be enough to convince officials that immediate action is needed; even the initially-cautious Martin Weale said they had given him the evidence needed to change his view and join those advocating stimulus. The indicators will also feed into the BOE’s new forecasts, which will probably see the central bank cut its growth projections for the third time this year.
“This is the Bank of England trying to do the impossible, to try and put some numbers on this decline when it’s very hard to tell how deep it’s going to be,” David Stubbs, a global market strategist at JPMorgan Asset Management, said in an interview on Bloomberg Television’s “Countdown” with Anna Edwards. “They’re absolutely going to cut rates by 25 basis points at least. And I think they’ll do something else.”
To follow our BOE decision live blog, click here.
Central to any debate on stimulus will be how the MPC views the balance between lower growth and higher inflation. With the pound dropping about 9 percent on a trade-weighted basis since the EU referendum, policy makers are likely to revise up their price growth forecasts. Bloomberg Intelligence economist Dan Hanson said the central bank may project inflation above its 2 percent target for the whole of 2017.
Still, a currency-driven surge in prices is unlikely to be a barrier to stimulus and officials will probably prioritize boosting the economy. MPC members Gertjan Vlieghe and Andy Haldane have already signaled they’re willing to “look through” any temporary jump in prices.
Whatever happens, it’s clear that markets have high expectations, with traders pricing in a 100 percent probability of a rate cut. Speculation that more stimulus is coming has pushed five-year, 10-year and 30-year gilt yields to record lows in recent weeks.
And even though the pound has already fallen about 10 percent against the dollar since the referendum, investors are still downbeat on sterling. They’ve increased bearish bets on the currency to a record.
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“It is not a question of if the BOE will ease policy Thursday, but by how much,” said Kallum Pickering, an economist at Berenberg in London. “The BOE’s challenge is to send a well-balanced signal of a firm intent to do ‘whatever it takes’ without exacerbating the existing blow to confidence coming from the Brexit vote.”