Shaun Port: we expect a cut to 0.25% and £25bn in QE

Nutmeg expectation

We expect a cut to 0.25%. We also expect a boost to quantitative easing of £25bn, taking total asset purchases to £400bn. We expect QE to be restricted to gilts, but we wouldn’t be surprised to see corporate bond purchases included as well. We think this is the consensus view, and we believe the market has already priced in a cut with near 90% probability.

The 0.25% cut is the most likely scenario as the Bank doesn’t yet have the data to show whether there’s been an abrupt halt in activity since 23rd June, or whether it has only been a mild slowdown. The Bank won’t want to use all its firepower at this early stage.

Alternative scenario

We think it is unlikely the Bank will hold rates. The more likely alternative scenario is that the Bank is more aggressive, cutting to a low rate of 0.05% or 0.10% and announcing that this is the new rate floor, and that there is no prospect of negative rates. In this scenario the Bank would also increase QE beyond an additional £25bn and it would probably restart the Funding for Lending programme.

Outlook

We remain bullish on gilts. The 30-year government bond yield has collapsed from 2.19% to 1.57% since the referendum and we expect lower yields even from these exceptionally low levels.

We also expect to see the FTSE 100 rise further, given the likelihood that the Bank’s actions will push the pound even lower.

Contact: pr@nutmeg.com