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Yields Tumble Following BoE Rate Cut and QE Increase
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European yields tumbled following the BoE decision, with the Gilt yield dropping 15 basis points to 0.65% as the race to the bottom continues. The Bund contract, which outperformed ahead of the BoE decision is now underperforming, but also extended gains. European stock markets were also underpinned, with the FTSE 100 now up 1.00% after underperforming the DAX during the European AM session.
The BoE MPC voted unanimously for the rate cut and by 6-3 for the expansion of QE. One of the dissenters on QE, Kristin Forbes, argued that it was excessive given the lack of hard data since the UK’s vote to leave the EU. Of the GBP 70 billion increase in QE, GBP 10 billion will be for the purchase of sterling denominated investment-grade corporate bonds, and the rest for Gilts.
The BoE Reduce Growth and Inflation Forecasts in its Quarterly Review
In its Quarterly Inflation report the BoE made its biggest downward revision to its UK growth projection in 20 years, forecasting growth of 0.1% in the current quarter before stagnating over the next six months. The growth forecast through to the 2019 three-year horizon has been revised down by a cumulative 2.5 percentage points compared to forecasts made in the previous Inflation Report, published in in May. The minutes to the meeting today that “a majority of members expected to support a further cut in the bank rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.” The MPC was concerned about the impact of lower rates on banks and their ability to cut their deposit and lending rates, and have designed a Term Funding Scheme too counter this scenario.
In other news, Eurozone retail PMI stuck in contraction territory, held back by weak Italian numbers. The readings improved across the board in July, with the German number rising to 52.0 from 51.6, the French to 51.6 from 51.0 and the Italian to 40.3 from 40.2, but while German and French PMIs point to expansion, the weak Italian PMI kept the overall Eurozone number in contraction territory at just 48.9.
