On Thursday July 14, the Bank of England (BoE) announcement saw eight MPC members voting for a ‘no’ change in U.K monetary policy, while clearly signalling their intention to provide more stimulus next month having warned in advance of the June 23 vote that economic growth would likely slow in that event.
Those aside, there are five distinct insights that came across from the BoE this week:
1. Clear signal.
Central bankers tend to deliver, more often than not, ‘opaque’ messages, littered with abundant qualifiers, while attempting to hint at actions to come rather than making firm commitments.
This week the BoE seems to be taking the opposite approach. Despite surprising a large percentage of the market, most MPC members “expect monetary policy to be loosened in August,” the minutes said.
The no change decision was due to the need to dig deeper into the “various possible packages of measures,” while the scale of action to be taken would be determined by “the committee’s updated forecast.”
In short, there will be a rate cut, and probably other measures to boost its effect come August 4th.
The market price action immediatly after the MPC’s “no” change announcement strongly suggested that many market participants were surprised, having expected an immediate response to the Brexit vote.
Did investors not hear what Governor Carney had said earlier? He distinctly indicated his preference for August in a speech just last week after the result of the referendum became know.
It seems that he and his fellow policy makers obviously feel more comfortable wit a few more data points.
3. The options
The BoE’s reference to “a package” suggests that U.K policy makers are looking at something more than a rate cut.
Although the minutes did not go on to discuss potential options, in the past they tended to list other possible solutions to provide stimulus, for example reviving the their bond-buying program and/or extending purchases to corporate debt, or increasing the supply of credit for households and businesses via cheap loans through its existing “funding-for-lending” program.
However, one solution you can expect Carney to shy away from and that’s negative interest rates – the governor thinks NIRP makes life even more challenging for lenders.
4. A dove.
Price action after Thursday rate decision suggests that a higher percentage of the market were dovish than first thought.
The individuals that expected the MPC to leave policy unchanged were probably a tad surprised to see so few voted in favour of action. There was one lonely dove – Gertjan Vlieghe voted for an immediate cut in the key interest rate to +0.25%, to be supplemented by more action in August (MPC official vote 0-1-8)
The minutes also indicated that he was on the brink of voting for a cut even before the June 23 Brexit vote.
5. The evidence.
MPC members did not have much to go on in terms of assessing the possible scale of the impact from Brexit at their July gathering, although they noted there were already indications that “economic activity is likely to weaken in the near term,” citing sharp falls in some measures of household and business confidence.
They also cited feedback reporting that some U.K businesses have delayed investment and hiring decisions in the wake of the June 23 vote.
On the outlook for inflation, the MPC expects the weaker pound (£1.3152, down -14% since June 23) to push up prices in the short-term, while the long-term outlook depends on whether expectations also move higher, promoting higher wage demands and further price rises.
The market has just less than three weeks until the next BoE rate announcement (August 4th). Despite the fluidity of current market conditions, trading the pound outright, or on the crosses remains a challenge.
For sterling dealers, it’s back to the drawing board. With expectations of monetary easing in August, combined with the uncertainties in the aftermath of the U.K. vote to leave the EU, suggest that this week’s support for the pound may be short-lived.