Bank of England Base Rate Cut Unlikely from 'Non-Event' MPC Meeting

There is little chance of a rate cut or further quantitative easing (QE) by the Bank of England's monetary policy committee (MPC) at their upcoming meeting on 2 August, despite a sharpening downturn in the British economy.

With the recession extending into its third consecutive quarter, marked by a serious -0.7 percent GDP contraction in the three months to June, all eyes are on the rate-setting MPC, which the International Monetary Fund (IMF) has called on to slash its record-low base rate of 0.5 percent in half.

However recent policy moves, such as credit easing schemes Funding for Lending (FLS) and Extended Collateral Term Repo (ECTR) and a further £50bn injection of QE, have not yet had their chance to make an impact on the UK economy.

"It should be a non-event. They just launched loads of QE, and they've got the FLS underway which they think will be effective, so it would be somewhat a surprise if they topped that up in any big way with a new policy initiative," Richard Barwell, UK economist at RBS, told IBTimes UK.

"Some people out there have got them cutting the bank rate. We put the odds on that at about the same as Team GB winning a gold in the Olympics and no-one in the media commenting on it.

"It is about that likely."

Minutes from the MPC's July meeting show members agreeing that there should be no rate-cut for several months, until the effects of recent monetary policy drives are known.

"It is almost like an open letter to the market saying why are you pricing this in, we keep saying we don't want to do this, it could be counterproductive," Barwell said.

"And they then say we'll agree to reopen this issue, several months down the line, if FLS hasn't worked.

"This is not several months down the line. This is not enough time to see if FLS has worked yet. It would basically be a massive u-turn."

In July the Bank's rate-setters voted for a further £50bn of QE, bringing the total value of the asset purchase facility to £375bn. It was the third expansion of the QE target since the programme was launched in 2009.

FLS and ECTR have been underway since July and see the Bank offer UK financial institutions cheap loans.

Under ECTR, banks can offer low-quality assets, such as credit card debt, as collateral in secured borrowing.

They can use these assets as security to borrow at a lower rate than they would out in the inter-bank market.

Under FLS banks will have access to cheap loans in direct correlation to the extension of their lending to the real economy of consumers and businesses.

The more banks lend out to the real economy, the higher the value of cheap loans they can get from the Bank of England.

It is hoped these efforts will increase the amount of affordable finance available to consumers and businesses, so people can buy their homes and businesses can invest in expansion and new jobs to help grow the economy.

Some feel there is increasing onus on the Bank of England to loosen its monetary policy further still in light of the second quarter's grim economic data.

"The market might have got shocked by Q2 GDP, but I don't think the Bank will have," Barwell said, adding that the MPC will have more or less anticipated the -0.7 percent decline.

The Diamond Jubilee celebrations, which saw Britons get an extra day off work, weighed heavily on output in the third quarter. Bad weather, which saw record rainfall in June, also helped pull the economy down.

A positive GDP figure is almost certain in the third quarter, with such a low comparative base to compare and the short-term uplift of hosting the London 2012 Olympic Games.

This adds yet more weight to the view that Bank of England policymakers will hold fire on more action at their next meeting, despite the most recent GDP data.