14.20 (GMT) Meeting Review
Expectations were running extremely high ahead of the August BOE meeting with traders anticipating that the BOE were going to follow through on earlier signals and deliver easing measures. However, opinions were split regarding which measures the BOE were likely to use with some looking for a basic rate cut whilst others forecast ores expansive measures including QE.
To the surprise of many, the BOE eased across a range of channels in August. The headline cash rate at 0.5% was cut to .25%,, 6 of the 9 MPC members voted in favour expanding QE, which will now run at £60bln over the next 6 months, whilst 8 of the 9 voted to launch a corporate bond buying program, which will run at £10bln for the next 18 months and finally all members voted in favour of a term funding program. Alongside these measures, the BOE noted that the majority of MPC members expected to vote for a further cut in the future though Carney noted that he “is not a fan of negative interest rates” and the lower bound for rates is “close to, a little above” zero.
The BOE noted that their economic outlook “has weakened markedly” following Brexit and growth forecasts have been revised lower in 2017 from 2.3% to 0.8% and also in 2018 from 2.3% to 1.8% with business investment and housing investment also expected to fall over the period. Inflation is expected to pickup due to the weaker pound, forecast to be at 2.1% in 2017 and 2.1$ in 2018 with measures intended to ensure that inflation won’t fall below target in the medium term.
Carney referred to the stimulus measures as “exceptional” and says that by acting early the BOE can reduce uncertainty and bolster confidence.
Sterling was sold heavily across the board in response to the new measures with GBP falling more than 1% against the US Dollar.
11.30 (GMT) Institutional Perspectives
ING – “Markets are fully pricing in a 25bp rate cut, but we think the greatest risk to GBP comes from a mispricing of QE that could also be announced as market participants are divided on whether more QE will be delivered. We expect the BoE to announce a fairly punchy stimulus package consisting of: (1) a 25bp Bank rate cut; (2) a £50-75bn expansion of QE asset purchases; and (3) strong hints that the FLS scheme will be extended. Such easing should weigh on GBP and keep it soft in coming months. As per FX Trader: Orderly GBP fall, we position for sterling weakness via 3-month EUR/GBP call with reverse KO barrier given our expectation of: (1) further GBP weakness; (2) such weakness being orderly in the coming three months. The latter is due to GBP stretched valuation, somewhat overcrowded short GBP speculative positioning and still some time left before Brexit negotiations start. Given our lack of near-term directional conviction on EUR/USD, we see EUR/GBP (rather than GBP/USD) as a cleanerway to position for a GBP idiosyncratic downside.”
11.20 (GMT) Institutional Perspectives
JP Morgan – “Our UK economists continue to look for an out-of-consensus 50bp cut. The firmly held consensus is for a 25bp cut to 25bp – only two out of 52 economist surveyed by Bloomberg expect more than a 25bp easing. We also expect £75bn in additional QE whereas the consensus on asset purchases is for no change (23 out of 44 economists expect no change to QE)”
11.10 (GMT) Institutional Perspectives
Credit Suisse – “This Thursday’s long-awaited Bank of England meeting will be its first ‘Super Thursday’
since the EU referendum. The interest rate and QE decision, August minutes and Inflation Report’s forecasts will be released simultaneously at 12:45 LON – followed by a press conference at 13:30. Unfortunately, we believe it may be more of a ‘Duper Thursday’ than the ‘Super Thursday’ that many seem to be hoping for.
The MPC’s July minutes had already indicated “an immediate loosening of monetary policy, to be supplemented by a package of additional measures in August”. Since then we believe easing expectations have run rather high in the market, and short GBP positioning is a factor that could bias GBPUSD higher rather than lower. As such, we see better risk/reward playing for a disappointment rally GBPUSD than for a sharp move lower after the BOE.”
11.00 (GMT) Institutional Perspectives
RBS – “UK monetary policy easing is coming in August. A rate cut – probably 25bp, possibly
50bp – is the most likely part of the package. A revamp of the Funding for Lending
Scheme also seems likely, though measures to prevent an undesirable rise in banks’
term funding costs are probably better viewed as a form of medium-term insurance
than near-term stimulus. The biggest question revolves around QE gilt purchases. In
our view, a resumption of QE is more ‘when’ than ‘if’. On balance, November seems
more likely than August.”
10.30 (GMT) Meeting Preview
July BOE Recap
Investor expectations ahead of the meeting were largely tipped in favour of easing with the rate swap market pricing a higher than 60% probability of a cut. Industry analysts were also aligned around a 25bps point. However the BOE refrained from easing at the July meeting despite one member voting in favour of a cut
The BOE judged that they needed to see more post Brexit data before making a decision and declared their intention to conduct a detailed and thorough analysis of all available policy options at the August meeting concluding that “Most members of the committee expect monetary policy to be loosened in August”.
Data & Developments
Incoming UK data since the last meeting has been a mixed bag with a clear divide between positive pre-Brexit data and a stark downturn in post-Brexit data.
- June CPI 0.5% vs 0.4% headline and 1.4% vs 1.3% core
- 2q GDP YoY 2.2% vs 2.1% and QoQ 0.%6 vs 0.5%
- Jul gfk consumer confidence -12
- Unemployment rate 4.9% vs 5% 3/m May, Earnings 2.3% vs 2.3% 3/m May
- Retail Sales June 3.%9 vs 4.8%
- July Services, Manufacturing & Construction PMIs all sub 50
The key takeaways from the data are the terrible PMI prints which, with each printing sub 50, marked the fastest economic contraction since 2009 and Services PMI particularly , a leading UK indicator falling to an 88 month low. Alongside this, consumer confidence in July hit a 7 year low, sharply highlighting concerns for the UK economy in the wake of Brexit.
Positive data prints from June CPI and 2Q GDP lose relevance as they reference the pre-Brexit period and so for now, Though no hard data has been released yet, initial survey data will weigh heavily on the BOE. Indeed, martin Weale, traditionally a hawk, who even recently argued that a rate cut was not needed has in recent days now changed his stance in support of easing.
Market Expectations Ahead Of The Meeting
With the BOE having clearly signalling the strong likelihood of August easing, markets have been piling into GBP shorts with CFTC positioning now showing GBP shorts at all time highs. This data presents a clear risk for the BOE who might struggle to satisfy such an expectant market.
To add to this we also have a high level of retail market short positioning with shorts currently sitting near 70%
Looking at the reaction that other currencies have had to rate cuts this year further clouds the outlook
- BOJ move into negative rates in January saw JPY sold off on the day but then rally for the rest of the year
- RBNZ March rate cut has seen NZDUSD move 600 pips higher
- RBA May rate cut, saw initial downside but was quickly reversed
- RBA August rate cut saw some initial weakness overnight but then losses were totally reversed over the next day
The precise driver behind these reactions is unclear though it appears to be a combination of the high level of market expectation and the fact that these move are so well priced in ahead of time and also the deteriorating level of effect that these conventional policy moves have in the post GFC world where banks have been slashing rates for nearly a decade now.
Measures Expected Tomorrow
Referring to comments made by BOE Governor Carney who noted that the BOE is still in “the conventional monetary policy” space indicates that the BOE is likely to first employ a rate cut. Indeed, the majority of analysts surveyed by Bloomberg are aligned around a reduction in the headline interest rate by 25bps.
The BOE has clearly communicated in recent months that it has no intention of moving into negative rates and Carney has oft times warned against the dangers of such a move.
With the BOE having held off from cutting rates at its July meeting and there seemingly being some anxiety about cutting rates too low, with concerns aired by Carney, chief economist Haldane and also the more hawkish Forbes, it seems that a 25bps cut alongside some other policy adjustments is the likely route.
Views From The MPC:
Forbes specifically noted that ‘Unfortunately, easing monetary policy not only has benefits, but also costs. People will earn less on their hard-earned savings – potentially cutting back on spending to reach a target savings pot. Banks will make less money – potentially making it harder for consumers and businesses to get loans. Pension and life insurance funds will have a harder time meeting their commitments. Companies may need to put more money into pension schemes, leaving less to spend on workers and investment. There is also the traditional concern from looser monetary policy – inflation.’
Carney himself also noted that ‘As we have seen elsewhere, if interest rates are too low (or negative), the hit to bank profitability could perversely reduce credit availability or even increase its overall price.’
The MPC have however referred to a “package” of policy options which suggests the likelihood of further measures being rolled out along with a rate cut but will these measure include QE?
Unlike 2008 banks have much stronger capital levels and without any serious financial sector solvency and liquidity strains, and with gilt yields at historic lows, there seems to e no urgent driver for further QE gilt purchases which may instead see the BOE turn to its Funding For Lending scheme with the option of restarting QE further down the road, potentially at the next “Super Thursday” in August.
Gauging Market Reaction
Gauging market reaction is a little tricky because as we discussed earlier, the transmission between monetary policy and currency movement has been quite dislocated this year suggesting that rate cuts and currency weakness are not necessarily married to one another.
However, in terms of seeking to identify potential scenarios and opportunities It appears that given the extreme level of positioning, market expectation, and what is priced in, that:
- If the BOE cuts rates by 25bs tomorrow with no further easing, then GBP is likely to rally on disappointment
- If BOE cuts beyond 25bps then we go lower
- If BOE cuts at any level and accompanies the cut with an expansion of QE then we go lower also.
However again referring back to the level of positioning. It feels as though GBP is going to struggle to go meaningfully lower and whilst a surprise tomorrow might see some short term GBP weakness the risk still seems skewed to the topside and before long, we could see a sizeable rally manifest.
For a look at technical setups ahead of the meeting please watch the accompanying video:
(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
- August 4th, 12.00GMT1
- Current rate 0.5%, expected 0.25%