Spread betting – Bank of England meeting main focus for markets

The Bank of England (BoE) convenes on Thursday (July 14th) for its monthly policy meeting, the first since the Brexit vote in June, amid a febrile market atmosphere and expectations it will announce fresh easing measures to boost the UK economy.

But it won’t be the first outing for Mark Carney following the vote. The governor of the Bank has come out to reassure markets and has faced MPs questions on financial stability.

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More Easing Expected

 

Most investors are betting on the Bank to launch fresh easing, possibly with a 25 basis point cut to interest rates and an expansion of the asset purchase programme.

Carney has hinted strongly at the possibility, suggesting on the day after the referendum that easing was likely over the summer. This week he told MPs that if the outlook for the UK economy has worsened, there “could be monetary response that is consistent” with the Bank’s remit.

Mr Carney has also suggested that a weaker pound would improve the UK’s current account deficit by boosting British exports and making imports less attractive. Britain's current account deficit recently struck a record high and this could be taken as a sign the Bank is prepared to tolerate a weaker pound.

The Canadian also took the opportunity to dismiss some of the “extraordinary” criticism levelled in his direction by Brexit campaigners.

Sterling Uncertainty

 

While markets are anticipating extra stimulus, it is far from a done deal. Slightly more than half of the 54 economists surveyed by Bloomberg think the Bank will cut rates on July 14th.

The pound has risen over the last three days, easing up from 31-year lows struck in the week before.

Greater political stability, as Theresa May is appointed prime minister, is feeding into stronger demand for sterling that has lifted the currency.

GBPUSD touched on 1.33 briefly as the pound rallied on news that the Conservative leadership contest was to be decided so quickly.

Why Not Cut?

 

The nine-strong Monetary Policy Committee is expected to ease to boost domestic demand and spur investment and hiring.

But there are strong arguments against lowering rates or boosting QE.

Sterling would almost certainly suffer if monetary policy is eased further. This could lead to higher import prices, driving inflation up. Deutsche Bank has warned that UK inflation could jump to 5.2% if sterling drops another 10%. Market inflation expectations have jumped since the Brexit vote.

The risk of overshooting on its 2% inflation target could stay the MPC’s hand, but if the outlook for the UK economy is judged to be worse, ​policymakers may choose to ease now and worry about the inflation problem later.