Divyang Shah, Senior IFR Strategist
The BoE minutes show that despite the 9-0 vote for keeping QE on hold the doves remain biased toward further stimulus. The change is that there is now a belief that QE was now seen as “one means” of injecting stimulus with the Committee “investigating other options during the month”.
It was this investigative phase that was responsible for the doves not wanting to call for additional stimulus at the July MPC meeting.
But the fact that the investigation on other options will happen “during the month” suggests a strong chance of some additional stimulus at the August MPC meeting.
The key paragraph in the minutes shows that the August response in assessing the merits of forward guidance and intermediate thresholds would “shed light on both the quantum of additional stimulus required and the form it should take”.
The message is that all options are open and the BoE will not just focus on its traditional route of expanded gilt purchases. While BoE governor Carney is only one voice within the MPC the fact that the BoE has a changed remit and could adopt forward guidance more formally provides Carney with a lot of leverage.
This is not just about voting patterns and ‘hawks vs doves’ but a BoE that agrees that the market pricing on the rate outlook is “not warranted” and whether they want to make this credible by delivering further QE.
It makes sense to deliver an additional £25bn expansion in QE alongside forward guidance in August. The advantage of forward guidance + £25bn QE is that it allows the BoE to limit the impact of likely Fed tapering to the UK money markets by creating easing expectations.
But the fact that there are six persistent MPC members to convince makes it difficult to call for additional QE at the August meeting as a central scenario.
