Thinking we were putting ourselves out on a limb, expecting the Bank of England (BoE) to do nothing tomorrow, perhaps we’re not as contrarian as we first thought. This comes after speaking to one of our press contacts who suggested a good handful of peers are thinking the same. And while we don’t expect any fireworks in terms of major policy change or stimulus, we do still anticipate a rather large helping of dovish rhetoric from Governor Mark Carney that further soothes markets worried about the economic fallout from and uncertainty unleashed by Brexit, still desiring their hands be held by exceptionally accommodative central bankers (CB) the world over.

So why don’t we expect the BoE’s Monetary Policy Committee (MPC) to fire any bazooka tomorrow?

Here’s a selection of reasons;

1. Despite markets getting their knickers in a twist, expecting a stimulus bonanza, Carney’s most recent post-Brexit appearance (30 June) saw him say “The Committee will make an initial assessment on 14 July, and a full assessment complete with a new forecast will follow in the August Inflation Report. In August, we will also discuss further the range of instruments at our disposal.”. He may have teased us, but he’s craftily committed to nowt from this tomorrow’s policy meeting. And in the UK the summer can easily last through to September.
2. With no UK economic data out since the Brexit vote, it’s nigh on impossible to gauge the true impact of the referendum over the near term, even if everyone is expecting a mild recession to ensue.
3. It might be unwise to move too quickly. It’s been barely 3 weeks since Brexit and Carney has been the most stable politician-like figure we’ve been able to look to. Why risk ruining it? Plus, after a rather uneventful tenure as Governor, he may want to bide his time before delivering his first actual policy change. And we all thought he’d come and go without doing anything.
4. Carney may have already played a Draghi-like masterstroke (maybe intentionally, maybe not) by mimicking the ECB-President in pledging to act and subscribing to the mantra “words speak louder than actions”. So far it’s working rather nicely with GBP already well off its lows, UK 100 +17% to beyond pre-Brexit highs and the more UK-sensitive delivering its own impressive recovery (+12.5%).
5. Home Secretary Theresa May is set to take the PM’s office today. This negates the need for a long summer leadership race, removes a large chunk of unwelcome political uncertainty and has already delivered a surprise boost to market sentiment. This must surely reduce the urgency with which the BoE Governor feels he must act.
6. The Governor has already delivered a stimulus of sorts in reducing the capital buffer that UK Banks must hold, in order to free up capital to allow more lending to consumers and business and keep the financing cogs of the economy in motion.
7. A rate cut on Thursday might help those on tracker mortgages, but it would also hurts bank profits. So why not delay any pain for the key sector?  And if political uncertainty has already been reduced, are consumers/business so scared that they still need to be led to the river of credit to drink?
8. Carney has made it clear he’s not a fan of the negative rates his peers have adopted in Europe and Japan. And why would he? They’re hardly working their magic are they? So why would he play his full hand and cut closer to zero (he only has room for two cuts from the current 0.5%), leaving himself less or even no room to move in the future?
9. If a rate cut is swerved, perhaps the BoE will merely revive the QE it mothballed back in summer 2012. How about another version of Funding for Lending Scheme (FLS) for banks – still technically in operation and available until January 2018. Then again as mentioned above, you can lead a horse to water, but you can’t make it borrow. Measures like these have been criticised in the past for not helping the economy per se, but they do tend to boost equity markets, which is a sentiment boost of sorts that investors rarely have a problem with.
10. Lastly, it’s only 3 weeks until the BoE’s quarterly inflation report (QIR). What’s the rush? Then the Governor can make sure it’s a proper Super Thursday.

Having said that, are markets so pumped up, pricing in more stimulus (BoJ, BoE) that they throw a hissy fit if they don’t get what they want? Have markets become so greedy and complacent that they feel they are owed big reactions from CBs every time there is a semblance of a crisis, just to keep the ball in the air? Have CB’s sussed this and feel obliged to act accordingly? Second guessing – it’s what markets are all about.

Good luck everyone – no pressure Mark!

Mike van Dulken, Head of Research, 13 July