BOE: Expect renewed caution as chances of November stimulus grow - ING

ING's DM economist James Smith and senior rates strategist Antoine Bouvet note that with November action from the Bank of England (BOE) looking ever-more-likely, they'll be watching closely to see if policymakers offer up any further clues on which tools they're most likely to use. The message of recent weeks suggests QE remains the preferred tool, although negative rates can't be ruled out either over the coming months.

"While it’s unlikely the Bank will rock the boat too much this week, there are two interesting questions."

"Firstly, will policymakers acknowledge that the downside risks to their August forecasts are growing? Certainly, some MPC members have been sounding more cautious in recent weeks."

"And if so, secondly, will the Bank offer any clues as to how it might increase the level of stimulus in November? Despite the recent hype surrounding negative rates, Governor Andrew Bailey has indicated that he believes quantitive easing (QE) is a more useful marginal policy tool, and this is likely to be at the centre of the stimulus package we expect in the autumn."

"On interest rates, there was a lot of discussion about the pros and cons of negative rates in the last monetary policy report, but the Bank is clearly still on the fence about how useful they might prove to be. In the first instance, we suspect policymakers will look to lower the interest rate on the Term-Funding Scheme, which incentivises lending to SMEs. However full-blown negative rates are also a clear possibility over coming months, particularly if the economic outlook were to worsen materially."

"The near-term outlook for gilt yields is more likely to be driven by any Brexit-related flight to quality flow than central bank action. This is because with about one and a half month before the all-important November meeting, odds of leaving the EU without a trade deal in place have time to swing about quite significantly. Nevertheless, Thursday’s meeting will be key in shaping expectations of further easing in November, and what form it would take."

"We think the market consensus is quickly converging towards answering the first question, whether to add easing in November, in the affirmative. This is not to say a dovish rates reaction to the BOE is impossible, but the bar is high, and it will largely depend on the MPC’s easing preference."

"Inputting two different scenarios to our long-term monetary gilt model highlights that the highest probability-scenario is also the least impactful."

"In light of recent MPC communication, markets have shifted back to QE being the most likely easing tool in the near future. This explains in part why an additional £100bn of QE would only shift 10-year gilt  ‘monetary FV’ lower by 20p by the end of 2021. More importantly, perhaps, this outcome on its own would not amount to a change in dynamic for GBP rates, with the floor holding firm around 0%."