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The Bank of England is expected to ease interest rates in its monetary policy meeting scheduled to be held on July 14 in an attempt to ease the growing anxiety over the possible breakdown after the Brexit outcome. Also, the BoE Governor Mark Carney had signaled the need for some easing over the summer, that raised hopes of such an action.
Financial markets have already priced in a 75 percent chance of interest rates being cut, from 0.5 percent to 0.25 percent this week, the first rate cut in more than seven years. However, rates are not expected to return to their current level for five years. The bank rate has been unchanged at 0.5 percent since March 2009.
In addition, the MPC is also expected to widely look through any short-term spike in inflation and instead aim to stabilize output and employment by loosening monetary policy. Policy makers are probably not too concerned about a weaker pound as it will support export growth.
"We think there is enough evidence to ease policy next Thursday. But the BoE will also want to keep some powder dry for later," said Nordea Markets Research in a research note.
Meanwhile, consumer price inflation is expected to rise following the recent depreciation in pound sterling. Inflation is likely to head towards the BoE’s target range of 2 percent. Meanwhile, the central bank cannot prevent a recession from happening, but it can try to cushion it by easing monetary policy despite the increase in inflation that is likely to happen due to the weaker GBP.
Further, the central bank is also expected to expand the quantitative easing program, by an estimated GBP50 billion raising the stock to GBP425 billion. Also, the recent step by the BoE to lower the countercyclical capital buffer for UK’s commercial banks to 0 from 0.5 percent can also be seen as a step towards additional easing.
"The BoE could well also cut the bank rate from the current level of 0.5 percent but we think this is more likely to happen in August," the report mentioned.
However, in an environment where the global environment is struggling the odds of an economic and financial crisis, easing too much at this point could send a wrong signal that increases uncertainty and hampers economic activity instead of supporting it.
