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 Thursday 14 July 2016

PM Bulletin: The BoE rate decision

 

 

Earlier today the Bank of England’s Monetary Policy Committee (MPC) surprised just about everybody when they voted to keep their headline Bank Rate unchanged at 0.5%. That means that we’ve lived with the same base rate for 88 months by my calculation which represents remarkable stability.

The market reaction was swift and violent. Sterling soared on the news as we can see in the 5-minute GBPUSD chart below:

PM Bulletin

Meanwhile equites sold off sharply on the news as investors were convinced that the markets were set to reap the benefits of looser monetary policy. FTSE100 5-minute chart.

PM Bulletin

I think it was a brave decision by the MPC. And I don’t mean it was foolhardy either. I think it was a courageous move to stand pat given the dire warnings (from the Bank and others) about the economic/market fallout that would result from a referendum vote by the UK to quit the European Union. The Bank had plenty of cover to go for a rate cut but they chose not to. And it wasn’t even a close vote as only one person in the 9-member MPC favoured a cut of 25 basis points.

However, the MPC’s summary has made it clear that most members expect monetary policy to be loosened at next month’s meeting. That seems reasonable as they will have had more time and seen more data to help them assess the ongoing impact of the Brexit vote. The MPC also stated that despite a fall in sterling, markets have functioned well. However, the committee has seen evidence that businesses are delaying investment projects and postponing recruitment decisions. In addition, activity in housing has slowed. Overall, the MPC still believes that the UK may experience lower growth and higher inflation as a result of its exit from the EU. Although it’s worth bearing in mind that further monetary easing is likely to send sterling lower and push inflation up even more. This certainly doesn’t look like a problem at the moment, but the Bank will be wary of unleashing an inflation genie which can only be brought back under control with sharply higher rates.

So now the market expectation is that the Bank will loosen monetary policy further at their next meeting on 4th August. But much will depend on data and private surveys that the BoE gathers before then. In the meantime it’s good to see a major central bank act with some restraint. It feels as if the BoE has taken a stand in a world where the whole financial edifice depends on ever- looser monetary policy.

David: I think it was a brave decision by the MPC. And I don’t mean it was foolhardy either.

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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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