» Prospects: UK: BoE Options: Ensuring Credit Supply the Focus? Decision Economics

Prospects: UK: BoE Options: Ensuring Credit Supply the Focus?

Posted July 28, 2016 by rvillareal

Summary Highlights

  • That the BoE will unveil additional stimulus measures when it presents the next MPC verdict on August 4 is in little doubt. However, alongside the unfolding hit to demand from the Brexit vote will also damage the supply side of the economy.
  • DE still contends that a UK recession may be avoided but that adverse price swings will hit the economy in due course. Higher consumer prices from the fall in sterling (pulling inflation to well above 2% next year) will damage domestic spending power and lower property prices will accentuate the hit to capital spending from Brexit-related uncertainty whilst adding to consumer woes.
  • Probably the fall in the pound will be the key factor for the BoE to assess and perhaps the BoE should not take action that may only encourage even more marked sterling weakness, as the boost to growth may actually prove to be modest and perhaps fleeting while the ensuing rise in inflation will hit domestic spending power.
  • The BoE focus should be on attempting to try and maintain the supply of credit. Interest rate cuts may be relatively ineffective in this regard and are anyway highly unlikely to offset the impact of uncertainty and other factors (such as lower property prices) in dampening credit demand.
  • The BoE is likely to keep at least some of its limited ammunition dry for the moment, waiting for a fuller assessment of the economic backdrop and outlook. DE expects a 25 bp cut and the full relaunch of the FLS next Thursday, with asset purchases likely to be kept in reserve!
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