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 Wednesday 13 July 2016

PM Bulletin: BoE Rate Decision in focus

 

 

For many years there has been precious little interest in the Bank of England’s MPC meetings and rate decisions. The official Bank Rate has been firmly lodged at 0.25% (the lowest rate in the Bank’s 300-plus year history) since March 2009 while the Asset Purchase Facility (QE) has been stuck at £375 billion for the last four years.  There were a few moments in between meetings when Mark Carney (installed as Governor in July 2013) teased the markets with hints of impending rate hikes only to back pedal soon after. His comments led to UK MP Pat McFadden to suggest that the Bank was acting like an “unreliable boyfriend” leaving everyone unsure of where it stood. But the meetings themselves have passed by without much incident, the only excitement being when the occasional MPC member has voted for a modest hike while the rest of his colleagues have backed the status quo. But tomorrow is very different. This meeting is the first since the UK voted to leave the European Union and its significance can’t be overstated.

One big issue is that the Bank (rightly or wrongly) took a very public stance ahead of the referendum. To many observers it was viewed as right and proper that the UK central bank should express any concerns it may have over a Brexit decision. Others felt the Bank should have stayed silent while a significant proportion of people felt that it could have offered up a more “even-handed” appraisal.

So what happens tomorrow is important, and in the immediate aftermath of the vote Dr Carney said he expected some monetary easing would be required “over the summer”. As far as the headline Bank Rate is concerned the majority view is that we’ll get a cut of 25 basis points to take it down to 0.25% from 0.50%. This would leave the BoE with some ammunition left for later on. There’s an outside chance that the MPC goes all-in and cuts to zero while analysts at Bank of America Merrill Lynch think a cut of 0.40% is possible. Another scenario is that the Bank leaves rates unchanged giving the markets longer to price in Brexit uncertainties. This would make some sense as next month’s meeting is a big one when the Bank’s quarterly inflation report is also published. However, if the Bank stands pat tomorrow we can expect the press to have a field day with Dr Carney. Although there can be no change in monetary policy unless there is a majority vote by the nine members of the MPC it will be Dr Carney who will be left with egg on his face given his dire pronouncements concerning the UK economy following a Brexit vote. This may be a touch unfair as last week the Bank cut its countercyclical buffer for banks to 0% from 0.5% freeing up £150 billion in extra capital for banks to lend out to businesses and households.

As far as QE is concerned, there’s no doubt that the Bank is prepared to increase its Asset Purchase Facility from its current level of £375 billion. However, the consensus expectation is that the MPC will hold off for now preparing to keep its powder dry should there be a more significant market disruption.

But sterling has steadied over the last few days and cable is now trading quite comfortably back above 1.3000. At the same time the FTSE100 is now over 5% higher than it was prior to the Brexit vote. Even the broader-based, domestically-focused FTSE250 is only down 2.5% from its pre-referendum levels. That’s not to suggest that the all-clear has sounded, but it currently looks as if “Project Fear” was overdone.

Overall, it feels as if a 0.25% cut is priced in. Anything more than this and sterling will come under further pressure while equities rally. If the Bank leaves rates unchanged then expect sterling to rally and equities to pull back initially at least.

David: So what happens tomorrow is important, and in the immediate aftermath of the vote Dr Carney said he expected some monetary easing would be required “over the summer”.

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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