The BOE’s Monetary Policy Committee (MPC) will announce its monetary policy decision as well as release its quarterly inflation report tomorrow (August 4, 11:00 pm GMT). Will they decide to cut this time? Here are some things you should keep in mind if you’re planning on trading this event.
1. A rate cut is very likely
The BOE kept its powder dry during the July meeting by maintaining the main rate at 0.50% and asset purchases at £375B. However, the vote to keep the current monetary policy was not unanimous since MPC member Gertjan Vlieghe voted for a 25 bps rate cut then and there, which is already a very dovish sign.
That’s not all, however. The BOE’s meeting minutes also revealed that “most members of the Committee expect monetary policy to be loosened in August.” Heck, Martin Weale, one of the most hawkish MPC members, has even become more dovish recently.
Further easing is conditioned on “the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis,” however.
Still, 46 out of 49 economists surveyed by Reuters think that it’s prudent for the BOE to cut rates tomorrow.
2. Other easing measures possible
A rate cut is not the only monetary policy tool in the BOE’s toolbox. The BOE can, for example, also revive its asset purchase program. It can even expand its asset purchases to include asset classes other than government bonds, if it really needs to. And as revealed in the BOE’s meeting minutes, MPC members “discussed various easing options and combinations thereof.”
Unfortunately, the minutes didn’t give any details, saying only that the actual easing measures that will be implemented will be “determined during the August forecast and Inflation Report round.”
Do note, however, that of the 49 economists surveyed by Reuters, only 36 had an opinion on the BOE’s QE program. And of these 36 economists, only 17 think that the BOE will be restarting its QE program tomorrow.
3. Economic downgrades likely
Most of the available economic indicators reflect economic conditions before the June Brexit referendum. However, Markit has already released its PMI reports for the July period in order to show how business conditions and sentiment have evolved post-referendum. And, well, they were pretty bad.
The U.K.’s manufacturing PMI drastically fell from 52.1 to 48.2, which is the poorest reading since March 2013. And commentary from the PMI report bluntly noted that “business activity has been adversely affected by the EU referendum.”
Next, Markit’s U.K. construction PMI ticked lower from 46.0 to 45.9 on “economic uncertainty following the EU referendum.”
Finally, Markit’s services PMI dropped like a rock from 52.3 to an 88-month low of 47.4, thanks once more to uncertainty due to the Brexit referendum.
One other thing worth noting here is that the PMI reports highlighted a “steep rise in manufacturers’ input prices, mainly due to higher import costs.” This could translate to higher inflation down the road and a possible inflation overshoot, especially if the BOE does decide to cut. And as I noted earlier, further easing is conditioned on “the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis.”
But as former MPC member Charles Goodhart said yesterday (August 2), “There’s so much assumption that the Bank will cut rates that even though the effect of that will be minimal, they will do it, because not doing it would have an adverse effect on their credibility.”
What does all that mean for the pound?
A rate cut or other easing move will likely trigger a quick selloff while a decision to hold off on further easing may trigger a rally. However, any follow-through buying or selling usually depends on forward guidance from the BOE, such as further easing moves down the road or reluctance to ease further.
Last time around, the BOE decided to maintain its monetary policy, which is why the pound spiked higher across the board. But since the BOE hinted at further easing in the upcoming meeting, the pound’s gains were very quickly capped.
Oh, also note that the BOE will be releasing its quarterly Inflation Report, which will provide us with an insight on how the BOE thinks the U.K.’s economy will evolve, as well as the likely direction of future monetary policy. So make sure to keep an eye on that as well, since that will also likely dictate follow-through buying or selling activity.
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