Morgan Stanley Forecasts BOE to Expand QE, Cut Interest Rate

Morgan Stanley changed its forecast for Bank of England stimulus and now sees policy makers expanding their bond-purchase plan and cutting their benchmark interest rate, citing a deteriorating economic outlook.

The central bank will increase so-called quantitative easing by 50 billion pounds ($78 billion) in both November and February and lower its benchmark rate by 25 basis points to 0.25 percent in November, London-based economists Melanie Baker and Jonathan Ashworth said in an e-mailed note to clients today. They had previously predicted no more purchases or a rate cut.

Data last week showed the U.K. economy shrank the most in more than three years in the second quarter, deepening its first double-dip recession since 1975. The weakening outlook prompted Barclays Plc yesterday to change its forecast for U.K. stimulus, with economist Simon Hayes now expecting an increase in QE of 50 billion pounds in November and a reduction in borrowing costs.

“We have become much more pessimistic on the outlook for investment in particular,” Baker and Ashworth said in their note. “There’s only so much policy makers can do given the poor economic backdrop and huge uncertainty about future events in the euro area.”

Morgan Stanley also reduced its gross domestic product forecasts and sees the economy shrinking 0.5 percent this year before growing 1 percent in 2013, compared with previous estimates of 0.5 percent and 1.8 percent expansion respectively.

Manufacturing Slump

Data today showed U.K. manufacturing shrank the most in more than three years in July as new orders slumped. A gauge of factory output, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, fell to 45.4 from a revised 48.4 in June, Markit said on its website today. A reading below 50 indicates contraction.

The Bank of England’s Monetary Policy Committee, which begins its monthly two-day meeting today, will maintain its target for bond purchases at 375 billion pounds tomorrow, according to all but one of 40 economists in a Bloomberg News survey. Scotiabank changed its forecast in a note dated July 29 and now sees an expansion of the asset-purchase target by 25 billion pounds this week.

All 53 economists in a separate poll say the bank will keep its benchmark interest rate at 0.5 percent. The central bank announces its decision at noon in London tomorrow.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE