Afternoon analysis 18.07.2016

Gertjan Vlieghe and Martin Weale on the monetary policy of the Bank of England. Szałamacha on the possibility of modifying macro establishments of the next year budget. The government will make the decision regarding retirement age tomorrow.

Despite that the Bank of England will most likely decrease interest rates at its next meeting, it is worth focusing on the statements from its particular members. They may suggest the scale of the monetary easing, as well as whether there will be a return to the assets purchase.

The BoE member, Gertjan Vlieghe published an article in today's Financial Times. He was the only one of the British monetary authorities, who decided to vote against a decrease in interest rates at the previous meeting. The article reveals that he was considering the monetary easing before the referendum, due to the fact that the economy was slowing down.

Vlieghe also claimed that, “I was a supporter of the immediate monetary easing that would be completed with a package of additional tools in August.” This attitude is slightly more dovish that the one, presented by the main BoE economist on Friday.

Martin Weale is more moderate in his views. He is considered as a representative of a more conservative approach towards the monetary policy. In the first half of 2014, he voted for raising interest rates. Later, at the end of 2015, it was speculated that he might join Ian McCafferty who was a supporter of continuing the monetary tightening until January 2016.

Weale did not make up his mind about the monetary policy yet. He also thinks that it is necessary to be careful not to tighten the monetary conditions with a decrease in interest rates. As an example, he mentioned Switzerland. Weale probably referred to the situation, when the negative interest rates slightly increased the costs of hypothetical credits, instead of decreasing them.

Weale said that he considers the extension of assets purchase as an effective action for the United Kingdom, as well as the euro zone. This may be a hint that he would vote for this action. For the time being, no more testimonies from the BoE representatives are planned. However, apart from the monetary tightening, we may expect some other elements that will decrease financing costs for households, as well as enterprises.

Decision regarding retirement age

According to the official order of the Council of Ministers meeting tomorrow, there will finally be a discussion regarding changes in pensions that was prepared by the President's office. On one hand, we have recently received signals that the project will be introduced without an additional criterion of age. On the other hand, the press announced (today's Wyborcza) that two more ministers, apart from minister Szałamacha, refuse to decrease retirement age without additional conditions. They are minister Gowin and minister Morawiecki.

Due to the fact that pension reform will increase the public finance sector deficit in the forthcoming years by approximately 0.4-0.5% per year, the risk of exceeding the 3% limit of the deficit in 2017, as well as 2018, would increase significantly. Despite that Fitch will not make a decision regarding rating for this year, Moody' will review it in September. With a negative perspective, deterioration of the debt trajectory against the GDP could cause a downgrade of the loan credibility.

It is also worth focusing on today's statement from minister Szałamacha. He did not exclude a modification of macroeconomic establishments for the 2017 budget establishments. Analytical centers, such as IE NBP, expect the growth to be decreased to approximately 3.2% y/y. However, making these expectations real should not have a negative impact on the PLN.