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On Thursday (4 August), Mark Carney’s reputation will be on the line as the BoE reconvene for the second time following the EU referendum. Carney announced with gusto that we will see action from the BoE in the summer, which leaves Thursday as the remaining option.
Thursday’s meeting will be a particularly volatile one, thanks largely to the plethora of economic data which is included on any ‘Super Thursday’. This is the moniker for a BoE meeting which includes the release of the inflation report alongside the usual monetary policy decision, statement and minutes.
Interestingly, there is precious little evidence for the MPC to go on coming into this meeting. To act last month would have been doing so on a hunch, whereas this time around the decision will be largely dictated by two reports.
BoE Agents' Summary of Business Conditions
This BoE report was released on 20 July, providing intelligence on business conditions following the EU referendum. The report noted that around a third of businesses questioned found that they expected the referendum to negatively impact investment decisions, with planned mergers and acquisitions being cancelled or postponed.
They also noted that the referendum would have a negative impact upon hiring. That being said, for many, the failure to provide a contingency plan meant that it was largely business as usual.
The release of two mid-July PMI surveys from Markit will constitute the main source of information that the committee will utilize for the upcoming meeting.
While these ad-hoc reports saw a contraction in both manufacturing and services, it was the all-important services sector really bore the brunt of the referendum result, contracting at steepest pace since early 2009. The benefits of a weaker pound is likely to only really benefit the sale of physical goods rather than services, and this coupled with the fear of services sector jobs moving to the EU means hiring and investment will be disproportionately focused on that sector.
Given that services currently constitute 79% of the UK economy, the notion that we will see a severe contraction has obvious consequences for GDP and jobs going forward. According to this PMI release, the BoE have to act in order to avoid such a shock to the economy.
What will the BoE do?
The overnight index swap (OIS) market attaches a 100% probability for some sort of rate cut on Thursday. Interestingly, that breaks down as a 95.3% chance of a 25 basis points cut and a 4.7% chance of a 50 basis points cut. Given that Mark Carney has previously said that he does not believe in the positive outcomes of negative rates, this aspect of monetary policy has little room for maneuver.
It is clear that the BoE are likely to act this time around, with the minutes stating that “most members of the Committee expected monetary policy to be loosened in August.” Crucially, the minutes also stated that the “committee members had an initial exchange of views on the various possible packages of measures.”
This alludes to the fact that the MPC is looking further than simply cutting rates, which coincides with the fact that interest rates may have little part to play in future policy given Mark Carney’s position on negative rates. This of course raises the possibility that the committee could see a quantitative easing or funding for lending scheme (FLS) as more fitting to resolve recent weaknesses.
If there is anything markets love it is QE and as such, the implementation of a new QE programme would be likely to spark substantial stock gains and sterling weakness.