Investment Clock insights

Summary of today’s BoE action

Ian Kernohan

4 August 2016

The Monetary Policy Committee (MPC) voted 9-0 to cut the Bank of England (BoE) base rate to 0.25%, with the majority indicating that a further cut is likely later this year.  There was a majority decision to increase Quantitative Easing (QE) gilt purchases by £60bn, plus £10bn of corporate bond purchases.  All these were in line with my own expectations.  The thing that surprised was the new Term Funding Scheme, which will provide funding for lenders at interest rates very close to the BoE base rate.  The intention is to offset the likely squeeze on lenders’ profit margins at these ultra-low rates.  

The MPC’s new economic forecasts are broadly similar to our own base case, although they are actually a little more optimistic on near-term growth prospects.  Their GDP forecast for next year is now just +0.8% (the largest ever MPC downgrade), which given what we already know about H1 2016 growth, implies no recession in the second half of this year (ie. small positive growth rate).  Therefore the bar to another rate cut is set very low, given that many forecasters actually expect a shallow recession in H2 2016.  Their new Consumer Price Index (CPI) projection implies an overshoot at the 2-3 year horizon, but it’s not huge and their remit already allows them to take a flexible approach to the target, if they feel the circumstances warrant it.  In other words, they are prepared to risk slightly above target inflation, in order to prevent a larger increase in unemployment.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.