BoE could add to rate cut with more QE

The Bank of England (BoE) is widely expected to ease monetary policy this week in response to concerns that ‘Brexit’ has further weakened an already slowing UK economy, making it less likely that inflation will hit the Bank’s target over its two-year time horizon.

Among the factors likely to underpin an easing are surveys showing weaker investor and consumer confidence, softer PMI and industrial production figures and anecdotal evidence regarding weak investment spending intentions.

A more competitive sterling exchange rate and signs of resilient exports are positives, but are unlikely to prove decisive for the MPC. Nor is some expected easing of fiscal policy, given lags in implementation and uncertainty about its scope and timing.

The market anticipates at least a quarter point cut in the base rate, but an expansion of asset purchases and a ‘bias to ease’ would not be surprises.

Fed December rate hike likely

The US economy appears poised to grow at or slightly above 2% in H2 2016. A weaker than expected US Q2 GDP headline figure masks a contraction of inventories that bodes well for production in H2. Real household income and debt formation underpin consumption, but business investment spending remains noticeably weak. The US manufacturing ISM survey dipped last month, but the details (orders) were a bit stronger than the headline.

US employment growth is decelerating from its two-year average pace of about 200,000 per month but the 3-month moving average of nearly 150,000 new jobs remains above the natural rate of growth of the labour force. Normalisation of output/labour ratios, a smaller pool of skilled workers available for employment and some increase in the cost of labour are factors behind the modest slowing of trend employment growth and suggest a near full employment economy.

The July and August employment reports will be critical for the Fed’s September policy meeting and will be closely watched by market participants, who have increased the probability of one Fed rate hike in December to nearly 50%.

Larry Hatheway, group chief cconomist and head of Multi Asset Portfolio Solutions at GAM

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