“Brexit makes the BoE look more like the ECB”

August 9, 2016

European Central Bank (ECB) president Mario Draghi (L) and Bank of England governor Mark Carney arrive at the Bank of England's Open Forum 2015 conference on financial regulation, in London, Britain November 11, 2015. REUTERS/Suzanne Plunkett - RTS6HCJ

Britain’s vote to leave the European Union on June 23 has already had several unforeseen consequences, as well as ones that were well-telegraphed beforehand and turned out to be surprisingly accurate, like the plunge in the pound.

But one outcome few predicted, in as many words at least, was that in voting to break away from the EU, Britain would push the Bank of England to become like the European Central Bank.

After all, for several years before the vote, the BoE was gearing up for rate rises, not cuts.

Instead, the shock to sentiment, business investment and already-reeling commercial property immediately after the vote to leave pushed the BoE to cut rates last week to just 0.25 percent after holding them at a record low of 0.50 percent for more than half a decade.

It also re-launched a quantitative easing programme that many Britons who follow such matters took great pride in declaring mothballed as Britain’s economy, which has outperformed the euro zone for most of the period since the financial crisis, looked more and more ready for a rate rise.

Taken together with widespread expectation that another BoE rate cut is on the way with the prospect of even more quantitative easing than announced last week, that does make the two central banks now seem more alike.

Credit Agricole CIB’s Global Macro Strategist Xavier Chapard said so directly in a note, “Brexit makes the BoE look more like the ECB.”

At its August meeting, the BoE surprised the markets (including us) by announcing an aggressive stimulus package that looks very similar to the one delivered by the ECB in March (with some slight differences). Indeed, the BoE cut its benchmark rates by 25bp to 0.25%, launched TLTRO II-like refinancing operations (the Term Funding Scheme), expanded QE with the purchase of an extra GBP60bn Gilts (to GBP435bn) and added a credit-easing scheme with the purchase of up to GBP10bn non-financial corporate bonds. Governor Carney even echoed Draghi’s words during the press conference when he said the BoE is ready to take “whatever action is needed”. 

The BoE almost committed to a final rate cut by the end of the year while ruling out negative interest rates (our UK economist now expects a 15bp cut in November to 0.10%). The BoE’s new projections are more upbeat than ours even if it slashed its growth forecast for 2017 by the most in history (from 2.3% to 0.8%). We still doubt the UK economy will be able to avoid a technical recession at the turn of the year.

BoE Governor Mark Carney made it very clear at the Inflation Report news conference last week that he had no intention of adopting negative rates, one area of policy where he clearly differs with ECB President Mario Draghi, not to mention his counterparts at the Bank of Japan and the Swiss National Bank, to name a few others.

But the idea of the BoE considering stimulus even just a year ago looked so unlikely that one economist promised he would film himself eating his shoe and then upload it to YouTube if the next move was a cut, and then dutifully did (or at least began to).

With a failed gilt buyback at only the second of the BoE’s reverse auctions for its re-started quantitative easing programme, there’s likely to be plenty more indigestion on the journey back to where the BoE was before June 23.

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