BOE voted unanimously to cut the Bank rate by -25 bps to 0.25% in August. The members generally expect more reduction later this year. Falling to the upper end of our forecast, it also expanded the asset purchase program by +70B pound to 445B pound, of which 60B pound is for the purchases of government bonds over 6 months and 10B pound for sterling non-financial investment-grade corporate bonds purchases over 18 months. The members were split on QE measures with 6-3 vote (Kristin Forbes, Ian McCafferty and Martin Weale dissented) in favor of increasing the government bonds purchases and 8-1 vote (Kristin Forbes dissented) in favor of corporate bond purchases. Policymakers also added a 100B pound loan program for banks. The staff trimmed the GDP growth forecasts for 2017 but upgrade the inflation outlook, expecting it to breach the +2% target by the end of next year. British pound plunged as the measures came in more than the market had anticipated. GBPUSD had fallen as much as -1.6% to 1.311 while EURGBP had risen as much as +1.1% to 0.849 after the announcement
Governor Mark Carney explained that the members "took these steps because the economic outlook has changed markedly... Indicators have all fallen sharply, in most cases to levels last seen in the financial crisis, and in some cases to all-time lows". He added that "a majority of members expect to support a further cut in bank rate to its effective lower bound". With regards to negative interest rate, Carney suggested that "the MPC is very clear that we see effective lower bound as a positive number, close to zero, but a positive number". He added that he is "not a fan of negative interest rates" and BOE had produced "negative consequences" elsewhere.
The QE measures were not decided unanimously. As the minutes suggested, the dissenters believed that "deterioration in recent surveys and confidence measures observed in the aftermath of the referendum may overstate the weakness of the economy. As such, the additional stimulus through immediate purchases of government bonds risked increasing the overshoot of inflation relative to the target". They judged that "any decision to purchase government bonds could be made at future meetings, once more information became available". Forbes was "particularly concerned about excessive stimulus at this stage, the costs of easing monetary policy, and the risks involved in the program".
On the macroeconomic forecasts, policymakers left the GDP growth estimate unchanged at +2% for 2016 but revised lower that for 2017 to +0.8% from +2.3% projected previously. Growth in 2018 is also revised lower to +1.8% from +2.3% previously. Note also that the staff does not expect recession in 2H16. The members now forecast inflation to reach +2.1% y/y by the end of 2017.
