Dovish BoE August inflation report - RBS

Research Team at RBS, suggests that the BoE MPC delivered a more aggressive policy response than expected: unanimous support for a 25bp Bank Rate cut, with guidance that rates will be ‘near zero’ by year end; a £60bn increase in QE gilt purchases and £10bn of corporate bonds; and a new ‘Term Funding Scheme’.

Key Quotes

“The monetary policy response was as aggressively dovish as could have been expected but there inevitably remain significant doubts about how the real economy responds. A parallel fiscal loosening is also likely to be required – supportive comments from Chancellor Hammond suggest fiscal loosening will be announced later in the year.

The BoE has acted as aggressively as could have realistically been expected. Whether modest Bank Rate cuts, further (sizeable) gilt purchases, new (modest) corporate bond purchases and support for term funding are sufficient to deliver the relatively mild slowdown in GDP projected by the MPC remains to be seen. We suspect that a looser fiscal policy stance (likely to be announced in the November Autumn Statement) and further supply-side reforms will be required. Overall, a welcome first step by UK policymakers.”