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

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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