Sterling Jumps As Bank Of England Disappoints - Holds Rate Unchanged, No New QE

Tyler Durden's picture

With markets pricing in an 86% chance of a rate-cut (compared to 11% pre-Brexit) and hopes high for some form of increased QE, Bank of England's Carney had highly dovish expectations to live up to today. Cable and FTSE were both rallying into the decision (with Gilt yields slightly higher). Given that there has been little post-Brexit data to show any effects, Carney appears to have decided to wait...

  • *BOE VOTES 9-0 TO KEEP ASSET-PURCHASE FACILITY AT 375B POUNDS
  • *BOE VOTES 8-1 TO KEEP RATE AT 0.5%; VLIEGHE WANTED 25BPS CUT
  • *BOE SAYS MOST OFFICIALS EXPECT POLICY LOOSENING IN AUGUST

And offeres hope for an August cut - after more data is available.

The pound is spiking on this disappointment - up 2.5%.

Stocks and bonds are both lower...

  • *U.K. TWO-YEAR GILT EXTENDS DROP; YIELD UP 4 BPS TO 0.15%
  • *FTSE 100 PARES GAIN AS BOE MAINTAINS BENCHMARK INTEREST RATE

The MPC Statement is a big disappointment:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target and in a way that helps to sustain growth and employment.

 

At its meeting ending on 13 July 2016, the MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%, with one member voting for a cut in Bank Rate to 0.25%.  The Committee voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.  Committee members made initial assessments of the impact of the vote to leave the European Union on demand, supply and the exchange rate.  In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the Committee expect monetary policy to be loosened in August.  The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round.

KEY POINT FROM STATEMENT: Most members of the Committee expect monetary policy to be loosened in August

  • MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%, with one member voting for a cut in Bank Rate to 0.25%.
  • Committee voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375b

Committee members made initial assessments of the impact of the vote to leave the European Union on demand, supply and the exchange rate; in the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the Committee expect monetary policy to be loosened in August.

The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round.

 

Since the Committee’s previous meeting, the sterling effective exchange rate has fallen by 6%, and short-term and longer-term interest rates have declined.

 

Reflecting the fall in the level of sterling, financial market measures of inflation expectations have risen moderately at short-term horizons, but only to around historical averages, and have fallen slightly at longer horizons.

 

Markets have functioned well, and the improved resilience of the core of the UK financial system and the flexibility of the regulatory framework have allowed the impact of the referendum result to be dampened rather than amplified.

 

Official data on economic activity covering the period since the referendum are not yet available.

 

Regarding the housing market, survey data point to a significant weakening in expected activity; indicators suggest economic activity is likely to weaken in the near term.

 

In addition, the sharp fall in the exchange rate will, in the short run, put upward pressure on inflation as the prices of internationally traded commodities increase in sterling terms, and as importers pass on increases in their costs to domestic prices.

 

The MPC is committed to taking whatever action is needed to support growth and to return inflation to the target over an appropriate horizon.

 

The exact extent of any additional stimulus measures will be based on the Committee’s updated forecast, and their composition will take account of any interactions with the financial system.

 

Against that backdrop, at its meeting ending on 13 July, the majority of MPC members judged it appropriate to leave the stance of monetary policy unchanged at present.

Which makes one wonder if Carmey is not keeping his poweder dry in the belief that this releif rally is short-lived.

What did the BOE Minutes say about the economy? Here is Bloomberg"

DID THE MPC CUT RATES, BY HOW MUCH?

  • No; it kept rates at 0.5%
  • That said, most members of the Committee expect monetary policy to be loosened in August
  • A slim majority of analysts surveyed by Bloomberg expected a cut as soon as today; 23 saw rates on hold, 25 saw a 25bps decrease

HOW SPLIT WERE THE VOTES ON THE MPC?

  • While most members voted to keep rates unchanged, Gertjan Vlieghe preferred to a 25bps cut at this meeting

WHAT ABOUT QE AND THE FLS?

  • While the minutes show the MPC discussed various easing options and combinations but didn’t give any further details
  • They say the precise size and nature of any measures will be determined next month

WHAT DID THE BANK SAY ABOUT STERLING, BREXIT, INFLATION?

  • There are preliminary signs the result of the referendum has affected sentiment in households and firms, including sharp falls in some measures of business and consumer confidence
  • There are signs some businesses are beginning to delay investment projects and postpone recruitment decisions
  • The MPC says influences could lead to a significantly lower path for growth and a higher path for inflation than were in its central projections in the May Inflation Report
     

Finally, as The Wall Street Journal notes, BOE officials said this month they are considering “a package” of stimulus measures to launch in August to support growth.

They weren’t explicit about their plans but officials have previously listed the tools at their disposal. They include rate cuts; reviving the BOE’s bond-buying program and extending purchases to corporate debt and other assets; and boosting the supply of credit for households and businesses by offering banks ultracheap loans through its funding-for-lending program.

 

Officials said they expect the economy to weaken in the coming months, flagging evidence of slowing business investment and falling consumer confidence. They said activity in the U.K. housing market looks set to weaken significantly.

 

The BOE will publish its latest forecasts for U.K. growth and inflation in its quarterly inflation report alongside its next policy decision August 4.

So jawboned promises of forward guidance is all we get in July.

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ANestIOS's picture

but it doesn't really matter because carney set up the BoE trading desk - "indices will stay supported"

DavidC's picture

For sure, you're right. Which is why, when this eventually blows up, it will be twice as bad as it would otherwise have been.

Lily Tomlin - "No matter how cynical I get, I can't keep up"

DavidC

JamesBond's picture

There is a handle to flush the shit filed economic toilet of the UK.  It is called a rate hike.  Pull it and flush the shit down the pipes.

 

jb

ArkansasAngie's picture

Silly sheeple.  

Abe is carrying everybody's water this news cycle.  The UK gets to stay pat.  The US gets to stave off politically upsetting the Fed's election directives from on high.

Cognitive Dissonance's picture

Abe does appear to be carrying the bazooka this time. Time to hide with the women and children. There's gonna be a LOT of collateral damage.

Bill of Rights's picture

Half the market runs for cover lol hilarious

DavidC's picture

It's NOT disappointment!

Given the sterling move downwards following Brexit and the FTSE heading north since then Carney would have been IRRESPONSIBLE to have lowered rates. I noted this in a couple of posts yesterday (and got down voted!).

DavidC

SomethingSomethingDarkSide's picture

Seriously, the market did it for him already

Amun's picture

Osborne and pre_brexit Carney did it for him,

for the post-Brexit Carney,

am really sorry for German manufacturing

really

(oh, never mind, they can reduce wages further with EU-slavery expansion into Asia (Turkey) next)

https://www.youtube.com/watch?v=MRhMkXeKJTE

 

El Hosel's picture

Loose longer Lucy, you are gladly pay us moar to take care of all your money....after all it are all mine anyway.

BorisTheBlade's picture

Having responsible interest rate policy was out of fashion for so long that very few remember that higher interest rates mean stronger currency. Don't mind downvotes.

DavidC's picture

Thanks Boris!

Yes, you're absolutely right about responsible interest rate policy. All the actions and jawboning now show the absolute desperation of central bankers.

DavidC

Arnold's picture

Janet Yellen's "School of Diction and Language" IPO.

Seems to be a worldwide smash hit, a 10 bagger.

Bennie is on the Board of Directors, I assume.

Krugman is Chairman Emeritus already.

Johnny Motel's picture

Sterling down, makes imports more expensive, since UK has current account deficit, this will put upwards pressure on consumer prices and further down the road, inflation. Inflation is something the BoE has been praying for...

thesonandheir's picture

David you were spot on yesterday, Carney hasn't got much firepower left at 0.5 so a cut would be premature. 

fjcruiserdxb's picture

You've been Up Voted now !

 

Factsruletheworld's picture

I know.  What the fuck are people saying this is disapointing for?  Fucking crap!  This is not disapointing.  Putting interest rates down would have sent completely the wrong message.  Carney has done nothing but talk Sterling down ever since his crappy prediction that we would not Brexit was found to be WRONG.  For once he did the right thing - or the BOE did on his behalf.  The UK economy is just fucking fine - central bankers stay the fuck out and leave things be.  Sheesh.

Baby Eating Dingo22's picture

With stocks at record highs and Brexit history, they'd be foolish to waste their last bullet

Plenty more rate cut opportunities ahead

THE DORK OF CORK's picture

Surprised zero hedge did not cover the latest exchange between Mogg and Carney.

The banks monopoly of credit and indeed propaganda was questioned.

https://www.google.ie/url?sa=t&source=web&rct=j&url=http://blogs.spectat...

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Jul 14, 2016 7:55 AM

At first everyone was worried because the pound was getting weaker, now they are worried because its getting stronger?

Déjà view's picture

Smooth sailing...

Seems H.M.S. Bounty needs to be 'rocked'! Must keep Scotland/N. Éire content...

jamesmmu's picture

DOW still up, because wall street say they will move at Aug. WTF!

you want to withdraw your money from wall street brokeage? they got a million excuses to get you keep playing in their game. 

MPJones's picture

I had hoped for a small increase in interest rate but this is the right decision. The London propperty market bubble is already deflating somewhat. The next change should be upwards, though. House prices in the UK need to come down by 20-30% at least, to enable young families to buy, and also for political reasons, to take away some of the undeserved gains now in the hands of speculators. We need to get onto the path towards deleveraging and sound money.