Mark Carney and his gang sure know how to a curveball! Yesterday the Bank of England (BOE) surprised the markets with the decision to keep its policies unchanged for the month of July. What’s up with that?!
Here are five takeaways you need to know from the event:
1. Keep calm and carry on
Yesterday the BOE’s Monetary Policy Committee (MPC) published its decision to keep its interest rates at 0.50% and its asset purchases at 375B GBP for another month.
The move surprised tons of market players who had been expecting some form of response to the Brexit fallout. More specifically, many were looking for the central bank to cut its interest rates by 25 basis points to 0.25%. Instead, the MPC decided that a wait and see mode is called for, although it also strongly hinted that a stimulus program is in the works.
2. Look on the bright side
Brexit wasn’t ALL bad for the economy. The BOE pointed out that sterling has fallen by 6% since the Brexit vote, which helps boost short-term inflation expectations as importers pass on their currently more expensive goods to the domestic economy. However, the BOE cautioned that the longer-term inflation outlook has actually fallen slightly after the event.
The EU referendum has also validated the BOE’s confidence in the U.K.’s financial system. The central bank noted that the “improved resilience of the core of the U.K. financial system and the flexibility of the regulatory framework” have cushioned the impact of the referendum. Talk about finding the silver lining!
3. Early signs of weaknesses
Perhaps the biggest reason for the BOE’s decision to stand pat is the fact that the official economic reports covering the post-Brexit period have yet to come in. That hasn’t kept the BOE from doing its own research though!
The central bank’s surveys have shown early signs that households and businesses are already adjusting their activities post-Brexit. Businesses are already delaying investment projects and recruitment decisions. This is bad news for the BOE, which is counting on employment to boost consumer spending and inflation. Even the housing market is seeing behavioral shifts, with the sellers and lenders offering better deals while the buyers are putting off their purchases in anticipation of lower prices.
4. Easing is coming
Because the BOE remembers. The MPC statement reminded us that the BOE has always thought that a vote to leave the EU could have “material implications” on the U.K.’s growth and inflation.
Despite the central bank’s less-dovish-than-expected statement, the central bank is still expecting to loosen its purse strings in August. In fact, MPC member Gertjan Vlieghe has already voted for a 0.25% rate cut this month and the other members have already “discussed various easing options and combinations” during this month’s meeting.
5. GBP jumped across the board
With most of the major market players positioned for a widely-expected interest rate cut, the BOE’s announcement sparked a buy-the-wrong-rumor-sell-the-news scenario for the pound.
GBP/USD spiked to a high of 1.3479 before capping the day 190 pips (+1.45%) higher than its open price while GBP/JPY reached 142.13 before ending the day 323 pips higher (+2.35%).
For now it seems like the BOE is not too worried over the Brexit’s impact on the U.K.’s markets, at least not enough to fire its biggest bullets at the first opportunity. More importantly, the BOE has given us the crumbs to follow to predict the size and scope of its next moves.
In the last part of its release, the MPC stated that “the extent of any additional stimulus measures will be based on the Committee’s updated forecasts” due on August 4. If the BOE pulls off a BOC and downgrades most of its predictions, then we might see a significant increase in the BOE’s stimulus program. On the other hand, smaller-than-expected downgrades could ease the investors’ concerns and push the pound higher across the board.
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