12.00 (GMT) BOE Decision
Rate remain on hold at 0.50% whilst voting shifts from 9-0 to 8-1
11.45 (GMT) Institutional Perspectives Ahead of The Meeting
Morgan Stanley sees sterling gains after the formation of a new U.K. government as a “selling opportunity” before a Bank of England announcement at 1100 GMT, where a 25 basis point rate cut is likely. The U.S. bank will also watch for commentary on additional easing measures. “Any talk of there not being a lower bound in rates or the potential for QE later on in the year would add to downside pressure for GBP,” says Morgan Stanley. It prefers buying EUR/GBP, targeting 0.90 initially. EUR/GBP trades down 0.7% at 0.8392. No rate cut could see GBP/USD rise to $1.35, against $1.3233 currently, but Morgan Stanley still expects $1.25 in coming months.
Goldman Sachs – “The sizeable Cable downside we now forecast is in line with the prediction of our interest rate differential model. Our UK economist, Andrew Benito, expects the Bank of England to cut Bank Rate by 25bp at its August policy meeting; he thinks the policy rate will not rise before end-2019 and that the BoE will restart asset purchases (£100bn over a period of six months in a mix of Gilts, corporate bonds and other assets). This, combined with an almost unchanged outlook for the US monetary policy stance that our US economists expect, implies a sizeable widening of USD-GBP interest rate spreads to 3% by the end of 2019 (or higher if the additional liquidity injected with asset purchases accounted for”
11.30 (GMT) Institutional Perspectives Ahead of The Meeting
RBS – There were echoes of Harold Macmillan in Governor Carney’s remark that ‘the Bank has identified the clouds on the horizon and can see that the wind has now changed.’ Although the Governor stopped short of a pre-commitment to a Bank Rate cut in July, a move this month seems to us more likely than not. With a 60% probability of a 25bp cut priced-in for July, failure to deliver would risk unnecessarily undermining market confidence. Our expectation is that a 25bp cut in July would be followed by another quarter-point reduction in August, taking Bank Rate to its floor. Subsequent, or parallel, BoE policy action would include further measures to support the flow of credit to the real economy and a resumption of QE gilt purchases around November.
Credit Agricole – The BoE will likely play an important role as a driver of the GBP outlook. Going into next week’s policy meeting, Crédit Agricole CIB economists are expecting a 25bp cut and signal of further easing ahead. This is consistent with the recent pricing in the rates markets, which suggest that investors are attaching a 75% chance to a 25bp cut. In addition, markets are attaching about 80% chance that rates will be lowered to zero before year-end. Given the rates market pricing, we believe that the BoE’s language about the aggressiveness and the type of future easing that will likely attract market attention. We also believe that investors expecting forceful, pre-emptive easing by the MPC may be disappointed.
11.10 (GMT) Institutional Perspectives Ahead of The Meeting
ING – “The first post-Brexit MPC meeting (Thu) will take centre stage and there is a growing air of expectation that the committee will lower the Bank rate this week (markets are pricing in a 64% chance of a 25bp cut). While our economists see a small possibility that the BoE could remain on hold, given the lack of economic data since the referendum and limited policy ammunition, we narrowly favour the MPC to press ahead with a 25bp cut this week. Nonetheless, we acknowledge that it is a close call and were the BoE to disappoint markets, we think that any GBP rebound will prove to be limited and short-lived for three reasons: (i) our models suggests that BoE easing expectations have accounted for around 2% of the post-Brexit move lower in GBP/USD, with price action being largely driven by heightened GBP risk premia; (ii) dovish forward guidance in the statement and minutes will signal that further easing (ie, QE) is on the horizon; and (iii) a lack of short builds in the latest CFTC positioning data implies that real money investors have been behind the recent GBP selling (as opposed to speculative bets). With markets only pricing in 35-40bps worth of total BoE easing, we think that a very dovish MPC (one that entertains further rate cuts and QE) will see the UK curve fall further, thus weighing on GBP. We prefer to sell GBP/USD this week on the back of diverging monetary prospects and target a move towards 1.2700.”
Barclays – “In our base case scenario, we expect the BoE to cut the Bank Rate to zero (currently 50bp) and
to deploy a new quantitative easing program: our baseline is for the BoE to aim at an increase
in the stock of the Asset Purchase Facility (APF) programme by £100-150bn from the current
£375bn. We expect the rate cut to be announced at the August meeting alongside the
Inflation Report, while a decision of a potential APF addition could take longer. The BoE already
reversed its earlier decision to raise the counter-cyclical capital buffer to 0.5% of risk-weighted
assets by March next year. This macro-prudential measure should further help support credit
from the supply side. In addition, the BoE could potentially deploy targeted funding for lending
schemes, if credit supply was to freeze up in the coming months. The future path of policies
would then be heavily dependent on ongoing levels of uncertainty, data responses, financial
stability concerns and the behaviour of the exchange rate.”
10.55 (GMT) Video Report With GBP Trade Ideas
10.45 (GMT) Quick Recap
Argument for a rate cut:
- The case for an imminent rate cut is that it would be consistent with discussions concerning the restarting of QE purchases potentially around the time of the Nov 16 inflation report alongside other measures aimed at boosting the flow of lending to the real economy.
- Additionally, decisive action at this stage maintains the BoE’s (and Governor Carney’s) credibility and assures markets that the bank is ready to follow up on their words, lending stronger support to guidance on future easing, enforcing the weight of verbal intervention. There were signs of economic downturn in the UK before the referendum and the Bank needs now to step in and provide support in the wake of this latest economic shock.
Argument against a cut:
- The case against a July move is simply that the BOE are yet to see survey data, let alone hard data and so would prefer to make a more informed decision in August. Furthermore, some analysts suggest that a cut at this stage will hurt the banks by causing a deeper contraction in their interest margins which are the difference between income derived from lending and borrowing fees.
- The longevity of Brexit risks also poses a complication at this stage with potential for the situation to materially worsen down the line as, for example, the official exit process commences and Article 50 is triggered. If Carney acts too early on he risks diminishing his capacity to act effectively in response to any
10.30 (GMT) Market Expectations Ahead of BoE
- Despite much pre-emptive rhetoric by the BOE chief and the rate swaps markets pricing a 60% probability of a 25bps cut in July the majority of analysts polled by Reuters ahead of the event suggest that the BOE will actually choose to keep rates on hold this time around, choosing instead to wait for the more detailed August forecast.
- The first data which will give a glimpse into the UK economic condition post-Brexit will be data from mid-July and waiting until the August meeting allows them to properly assess the situation instead of risking potentially responding in an unnecessary way and causing further FX devaluation.
- It is a fine line though, If the BOE does decide to keep rates on hold it risks damaging its credibility in the markets and suffering a sharp reaction such as we saw with the Euro in response to the ECB meeting of December 2015 where Draghi over promised and under delivered. This line of thinking suggests that the MPC will look to deliver some level of easing at tomorrow’s meeting, such as a small 25bps reduction accompanied by a clear signal of the scale of action we might expect from the BOE in August with most forecasting rate cuts alongside further QE.
- The key focus here however is definitely on the future guidance at this stage. A 25bps cut is priced in, so is likely to have little impact and really it’s going to come down to what carney signals about the august meeting. Carney swift response and decisive declaration of easing to come, may have worked to calm markets in the short term, but if he now fails to adequately deliver on those sentiments, he could find himself in a tight spot.
- In terms of gauging market reaction, the moves in response to Carney’s initial mention of additional stimulus following Brexit saw a sharp move lower in GBP, suggesting that should such stimulus materialise there would likely be plenty of scope for further downside with current positioning data also showing plenty of scope for further downside positions to be added.
- Retail sentiment however supports the idea that the BOE fails to deliver tomorrow, or at the very least, fails to provide a catalyst for further GBP downside. Current retail skew on myfxbook is over 60% ahead of tomorrow’s meeting.
10.20 (GMT) Market Reaction Post-Brexit
- GBP Fell 11% initially against the USD as the results came through, bottomed out at over -13% and has since staged a small recovery back to -11.5%. The large, initial, shock move was fairly limited in terms of duration with a two-day response providing the majority of the decline, followed by some shallower continuation to the downside in response to talk of a summer rate cut and the lowering of the counter cyclical buffer rates.
- With a small rate cut priced in and the official process for the UK leaving the EU yet to commence, at this stage it’s going to take a rather significant catalyst to provide an extension of this move and as profit taking emerges on GBP shorts there is a lot of debate and discussion about what action the BOE is likely to take this time around.
- Opinions and forecasts are widely split, ranging from keeping rates on hold and allowing more time to elapse to assess the damage, to cutting rates by a small 25bps with the option to cut again in summer, or an immediate 50bps cut now to act decisively
- So far from where we were pre-referendum when the BOE was looking to guide markets as to when rates were likely to raise again markets are now left in little mystery as to the timing of a rate move, but are now considering a move in the opposite direction and the only questions that remains concerns the scale of the moves.
10.10 (GMT) Key Developments Since Brexit
- In the immediate aftermath of the results being announced, Carney took to the wires announcing that the BOE stood ready to provide extra capital to cushion markets. Since then we also had the release of the BOE’s financial stability report which announced the lowering of the counter-cyclical buffer rate applied to banks in an effort to free up to £105bln for lending.
- We then also heard, in a second televised address, the BOE governor noting that uncertainty was likely to remain elevated for some time and the bank would now continue liquidity auctions for banks on a weekly rather than monthly basis alongside considering a host of other measures. Finally, carny noted that that “the economic outlook has deteriorated and some monetary policy easing will likely be needed over the summer. “as well as saying that in August we will also discuss further the range of instruments at our disposal
- During this release we also heard Carney noting the decline in Sterling was a normal function of market but warned that sustained capital outflows could lead to a continued and undesirable decline in Sterling.
- In recent days Carney has come under fire from allegations that he was coached by Government to scare the electorate into voting remain by exaggerating warnings of the economic damage that Britain was likely to incur as a result of Brexit. Carney thoroughly denies this however and stated that the views of the FPC are the views of the FPC and are not pre judged or pre decided.
- Referring to the reduction in bank buffer rates Carney said that the move is not expected to be a “silver bullet” but that it would help send a message to businesses and households that banks did have money to lend and that there would be no repeat of the 2008 credit crunch and Carney reiterated that the BOE has the tools to ensure both monetary and financial stability and noted also that the weakened Sterling exchange rate could actually positively affect Britain reducing the current account deficit by about a third.
10.00 (GMT) Welcome to our day’s rolling coverage
Hello and welcome to our live coverage of today’s BoE Meeting, with Littlefish FX Analyst James Harte. Here are the key details for the day:
- Bank of England Rate Decision May
- Thursday July 14th, 12.00GMT1
- Current rate 0.5%, expected unchanged
- Current voting 9-0, expected 6-3 in