BoE Preview: Trio of troubles to result in a concerned message


The Bank of England (BoE) is set to leave its policy unchanged in September but its views on recent developments – and the outlook moving forward are likely to rock the pound. The encouraging recovery so far is countered by uncertainty related to Brexit, the virus and the furlough scheme, FXStreet’s analyst Yohay Elam reports.

More – Bank of England Preview: Eight major banks expectations

Key quotes

“Officials have been hinting that a change in policy is unlikely after slashing rates to 0.1% and raising the Quantitative Easing program to a total of £745 billion earlier this year. Nevertheless, the BoE is set to rock the pound via its updated views on the economy. The accompanying meeting minutes will probably reveal a contrast between the relatively upbeat recovery and growing uncertainty – our outright fear about the next few months.”

“Instead of advancing toward a post-transition period trade deal, PM Boris Johnson is moving to violate the divorce bill signed last year. Parliament is debating a controversial bill that the government admits to breaking international law on customs arrangements. While the BoE is unlikely to comment on politics, it may stress that Brexit uncertainty has risen and poses a downside risk to the economy, potentially sending sterling lower.” 

“The UK imposed new restrictions following an increase in COVID-19 infections. The worrying trend poses a risk to the economy ahead of winter, when the situation may further worsen. The bank may conclude that most of the ‘low hanging fruit’ of the recovery has already been picked, and the disease now risks a full return to normal. On the other hand, officials are also following positive developments regarding approving a vaccine. Their approach may be more nuanced on the topic.”

“Britain's impressively low unemployment rate of 3.9% is a result of the government's successful furlough scheme – paying people unable to work most of their salaries. The program expires in October and Chancellor Rishi Sunak said it is unsustainable, adding that many people will lose their jobs. A cliff-edge fall of the scheme would deal a devastating blow to the economy and the BoE may hint that it is ready to buy more bonds to help fund a tapering down of the program. That would be pound-positive.”

 

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