BoE likely to ease monetary policy by expanding QE program; expected to lower bank rate in August

At the end of June, BoE's (Bank of England) Governor Mark Carney had stated at the end of June that monetary policy easing “will likely be required over the summer”. There is sufficient evident that the central bank will ease policy on Thursday; however, it would also want to “keep some powder dry for later”, noted Nordea Bank in a research report.

There are initial macro evidence post UK’s vote to leave the EU. The UK’s consumer sentiment fell severely in the beginning of July, and is not likely to be a one off. Furthermore, the National Institute of Economic and Social Research (NIESR) projects that the output has contracted already in the months of May and June and it would be worse for the month of July. Hence, the UK economy might be at the edge of a recession.

The UK’s central bank cannot avert the economy from falling into a recession; however it can attempt to cushion it by loosening the policy in spite of the acceleration in inflation that is expected to happen because of GBP's decline, said Nordea Bank. The policy makers are probably not much worried regarding a weaker currency as it will underpin export growth.

“We expect an increase in the QE programme, our estimate being by GBP 50bn, raising the stock to GBP 425bn,” added Nordea Bank.

The central bank might also include corporate bonds as an attempt to avert a tightening of credit conditions. The BoE might also increase QE further later in this year.

It might also lower the bank rate from the current level of 0.5 percent; however, this might take place in the month of August after assessing the inflation outlook deeply that will be presented in August inflation report. The BoE has maintained the bank rate at 0.5 percent since March 2009. The UK economy is expected to be in a mild recession in the second half of 2016 and early 2017, according to Nordea Bank.