The Bank of England (BoE) may have left interest rates on hold during today’s policy meeting, but there are strong indications that they will be cut lower in November. Markets had pretty much expected the outcome of today’s meeting, but traders had been holding out hope of an improved outlook from the Monetary Policy Committee (MPC).
Investors had hoped that the latest strong UK PMIs would have improved the MPC’s outlook on the UK economy. Markit Purchasing Managers Indexes (PMIS), which measure business activity, had shown that virtually all sectors of the economy had strongly returned to growth after falling into contraction due to the shock of the UK’s Brexit vote. The construction industry remained on the decline, but only marginally; which was still a much better result than forecasts.
These PMIs had suggested the Brexit had not had as significant an impact upon the UK economy as was feared. Market confidence grew on the hopes this meant the UK would not suffer many of the negative effects warned about, but economists continued to suggest the impact would be felt more slowly over the long-term. Bank of England policy makers had suggested this themselves and continued to hold that belief in the latest meeting, although the minutes did that note;
‘A number of indicators of near-term economic activity have been somewhat stronger than expected. The Committee now expect less of a slowing in UK GDP growth in the second half of 2016.’
Despite an improved outlook on the UK economy, the minutes contained several comments that caused investor consternation, including the statement that;
‘The Committee’s view of the contours of the economic outlook following the EU referendum had not changed.’
November sees the BoE release its latest forecasts alongside the announcement of the next decision on monetary policy. According to today’s meeting minutes, if the interim economic data has not markedly improved the MPC’s outlook and therefore the forecasts made in November are ‘broadly consistent’ with those made last month, then;
‘a majority of members expected to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.’
The median expectation from economists is for a -0.15% cut to take borrowing costs to just 0.1%. The spectre of a looming interest rate cut is likely to weigh on Pound exchange rates over the coming weeks, especially as the BoE have clearly signalled that extremely positive data will be needed to avoid further policy loosening. Expect strong GBP volatility in response to key UK data, such as the next run of Markit PMIs, which begin on the 3rd of October with the latest construction and manufacturing measures.
The Pound Euro (GBP EUR) exchange rate is trending around 1.1739.
The Pound US Dollar (GBP USD) exchange rate is trending around 1.3187.
The Pound Swiss Franc (GBP CHF) exchange rate is trending around 1.2835.
The Pound Canadian Dollar (GBP CAD) exchange rate is trending around 1.7414.
The Pound Australian Dollar (GBP AUD) exchange rate is trending around 1.7654.
The Pound New Zealand Dollar (GBP NZD) exchange rate is trending around 1.8155.
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