BoE keeps bank rate and size of asset purchase program unchanged; hints at easing policy in August

The UK’s central bank, Bank of England, unexpectedly, maintained the bank rate at record low level of 0.5 percent on Thursday. It also kept the asset purchase programme unchanged at GBP 375 billion. However, the BoE has hinted that additional stimulus will take place in August to support the post-Brexit economy.

The BoE’s MPC voted 8-1 to keep the key rate unchanged. One member voted for the interest rate to be lowered to 0.25 percent. Meanwhile, the vote to keep the size of asset purchase programme unchanged was unanimous.

Several members of the committee anticipate easing of monetary policy to take place in August. The minutes of the latest meeting highlight the likelihood of additional measures widely mooted to include the extension of  Funding for Lending scheme and the expansion of the Bank’s asset purchase programme, stated Markit Economics chief economist Chris Williamson.

According to the central bank’s statement, the exact extent of any further stimulus measures would be based on the updated forecast of the Committee.

The Monetary Policy statement mentioned that there are preliminary signals that the Brexit result has impacted confidence amongst firms and households, with severe declines in certain measures of consumer and business sentiment.

On the housing market front, survey data showed that a considerable weakening is likely in the activity. Altogether, these indicators imply that the UK economic activity is expected to weaken in the near term.

Meanwhile, on the inflation front, the central bank said the shortfall in headline inflation is mainly due to the unusual major drags from food and energy prices that are likely to ease over the next year. Moreover, the severe deceleration of the sterling would exert upward pressure on inflation in the short-term as the prices of internationally traded commodities would rise in sterling terms.

The central bank will present its new Inflation Report during the August meeting. The report will contain a deeper analyses of inflation and growth outlook. The BoE is expected to look through temporary rise of inflation above its target of 2 percent and ease policy because of the prospect of downward pressures on inflation and weaker activity in the medium term, noted Nordea Bank in a research report.

“At this juncture, we expect a 25 basis point rate cut to 0.25 percent in August and a GBP 100bn increase of the QE programme, raising the stock to GBP 475bn, probably in several steps,” added Nordea Bank.