BoE holds rates steady as pound sinks below $1.21 — live
Brexit, Brexit, Brexit
The FT’s George Hammond has crunched the numbers and found mentions of Brexit in the August inflation report have jumped since the previous one in May.
“Brexit” was mentioned 133 times, up from 87 in May.
“No-deal Brexit” garnered 87 mentions, up from 5 in May.
“Inconsistencies” in the Bank’s forecast
The Bank continues to assume a smooth Brexit in its forecasts. Those forecasts, however, take into account market prices which are based on very different assumptions (namely that no-deal Brexit is a significant and growing possibility). The inflation report acknowledges this, saying “given the MPC’s conditioning assumptions, there are some inconsistencies in the forecast”. So take the current projections with a pinch of salt, because they’re based on a path for markets which almost certainly won’t actually come to pass.
Sterling edges back above $1.21
The pound has largely shrugged off the entirely-expected decision to hold rates, and the pared-down growth forecasts from the Bank. It is now just above $1.21 after staging a minor rally into the BoE’s midday publication.
“What does a central bank do when the currency is in freefall?”
That’s the question asked by GAM investment director Charles Hepworth. He goes on:
Today’s decision by the BoE to do nothing on rates again is further acknowledgment of their inability to stabilise the political-inspired mess we see ourselves in. Hiking rates in the face of a slowing domestic environment is not an option, and rate cuts at this stage would lead to further falls in the currency. There is one further policy meeting ahead of the Brexit Halloween deadline, yet expectations for any move are still non-existent. Boris Johnson and his team might try to champion a new sense of optimism for Brexit, but he and his government team are the only ones that can inject any strength into sterling, and that outcome looks very difficult to see right now.
BoE cuts growth forecasts
Brexit uncertainty and global trade tensions are hitting UK growth, with the Bank of England’s latest forecasts showing a one in three chance that the economy will be shrinking by the start of next year, the FT’s Delphine Strauss writes.
In its August inflation report, the central bank cut its central forecast for growth this year and next, predicting output would expand just 1.3 per cent in both 2019 and 2020 even if it were to cut interest rates as markets have been expecting.
It said there was a 33 per cent probability of negative growth in the first quarter of 2020 if interest rates remained unchanged – the highest chance of a contraction it has seen since the immediate aftermath of the Brexit referendum in August 2016.
Even after taking account of the volatility caused by Brexit-related stockpiling and factory shutdowns, “underlying growth appears to have slowed since 2018 to a rate below potential,” the monetary policy committee judged, noting that weaker global growth and entrenched uncertainty over the Brexit process were weighing on companies’ spending.
BoE holds rates
The Bank of England has held its key interest rate steady at 0.75 per cent as had been widely-expected. The Monetary Policy Committee was unanimous in its decision.
It’s not all about Brexit
There are other reasons investors are betting on a dovish turn from the Bank. Firstly, economic data have been weakening – this morning’s manufacturing PMI for July showed the sharpest fall in output in seven years. Then there’s a bigger global shift in rates. The US Fed cut yesterday for the first time in a decade, while the ECB is heading for a big easing package in September. The BOE is looking increasingly out of step, and markets clearly think that’s unsustainable. 10-year UK government bond yields fell below 0.6% this morning, the lowest in history except for a brief dip in August 2016.
The Bank’s Brexit bind
Heading into today’s meeting, the Bank of England has been guiding markets to expect “gradual” interest rate hikes. Investors disagree, pricing in a better-than-even chance of a rate cut by the end of the year. That’s largely because the Bank’s forecasts assume a smooth Brexit, while markets have spent the past couple of weeks ramping up bets on a no-deal outcome – dumping the pound on the assumption that the ensuing chaos will lead to rate cuts as the economy tanks.
No one expects a rate cut today, but BOE-watchers are hungry for some Brexit clarity from Mark Carney. That could mean laying out two separate scenarios: one for a smooth Brexit (which would presumably continue to include a hiking bias) and another for no deal. To shift the markets, he would probably have to spell out what no deal would mean for rates, and how likely he thinks no deal is.
More pain ahead?
Things could get much, much worse for the pound, and the Bank.
Despite sterling’s recent tumble, many investors and traders have not fully priced in a no-deal exit.
“It is now the base-case scenario for me,” said Neil Jones, head of FX sales for financial institutions at Mizuho Bank. Mr Jones said in such circumstances the pound will likely trade at sustained levels around the $1.10 to $1.15 levels it briefly touched during a 2016 ‘flash crash.’
Analysts at US bank JPMorgan see a 25 per cent chance of no deal.
Our analysts expect cable at $1.15 in a no deal case. They consider that to be a conservative scenario and point out that cable could just as easily be another 10% lower.
Pound breaches $1.21 ahead of BoE
The pound has fallen below $1.21 for the first time since January 2017 ahead of the Bank of England’s interest rate decision later on Thursday.
Sterling fell 0.3 per cent against the dollar to $1.2093, weighed down by greenback strength in the aftermath of the Federal Reserve’s meeting and lingering investor concerns that Boris Johnson’s new government could be leading Britain into an autumn no-deal Brexit.
Sterling was 0.2 per cent lower against the euro at €1.0957.
The pound fell 4.2 per cent against the dollar in July as investor worries over the likelihood of a disruptive exit from the EU hardened.
The currency’s sharp fall is likely to push consumer prices higher, presenting a fresh headache for BoE policymakers, who are widely expected to keep interest rates on hold later today.
The Monetary Policy Committee is already grappling with how to handle the rising risk of a no-deal Brexit. Its forecasts currently assume a smooth exit from the EU.
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