BoE: Expectation is 25bp cut in July would be followed by another in August - RBS

Paul Robson, Research Analyst at RBS, suggests that with a 75% probability of a 25bp cut from the Bank of England priced-in for July, RBS economist Ross Walker believes failure to deliver would risk unnecessarily undermining market confidence.

Key Quotes

“His expectation is that a 25bp cut in July would be followed by another quarter-point reduction in August, taking Bank Rate to its floor. Subsequent, or parallel, BoE policy action would include further measures to support the flow of credit to the real economy and a resumption of QE gilt purchases around November.

The MPC might prefer to wait for the detailed August forecast round before sanctioning lower rates, but it is not obvious that there would be significantly more information by that point (a scattering of post-referendum surveys). The BoE was more aggressive and decisive during the financial crisis of 2008-09. That episode probably provides the playbook for the reaction function this time. With Bank Rate swaps rate largely priced by the August, GBP reaction looks dependent on what the MPC signals about the path of policy beyond this week’s meeting. We see further sterling weakness ahead.”