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BoE kept its nerves in check - Rabobank

Elwin de Groot, Senior Eurozone Strategist at Rabobank, notes that the “Pound Surges as BOE Policy Inaction Catches Traders Off Guard”, says one of Bloomberg’s headlines yesterday.

Key Quotes

“In fact, it was the second time in the space of three weeks that UK financial markets got it wrong. This time it was BoE Governor Carney who surprised markets by abstaining from a rate cut as well as any other monetary easing measures. The MPC voted 8-1, with only Vlieghe arguing for an immediate reduction in Base rate. As a result sterling shot up by more than 2.5% against the dollar in the immediate aftermath of the decision, although it retraced most that gain in the afternoon.

The minutes indicated that most members “of the committee expect monetary policy to be loosened in August”. Whilst some may argue that yesterday’s decision was simply a stay of execution with regard to a cut in Base rate, the minutes also noted that “the committee discussed various easing options and combinations thereof. The exact extent of any additional stimulus measures will be based on the committee’s updated forecast, and their composition will take account of any interactions with the financial system.”

In other words, the MPC wants a clearer view of the impact of Brexit (which, hopefully, comes with data in the coming weeks and the August 4 Inflation Report). But it also suggests that the MPC is open to alternative measures. As we argued in our preview, such measures are more likely to be targeted (trying to spur lending, without weakening sterling any further) rather than the use of a blunt, and potentially distorting, cut in the Base rate. That said, the latter will obviously remain an option if the economy turns out to be even weaker and cost-push price pressures, fuelled by the weaker pound, fail to materialise.”

Author

Sandeep Kanihama

Sandeep Kanihama

FXStreet Contributor

Sandeep Kanihama is an FX Editor and Analyst with FXstreet having principally focus area on Asia and European markets with commodity, currency and equities coverage. He is stationed in the Indian capital city of Delhi.

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