BoE Hints At Rate Cuts In Summer

Mark Carney, the Bank of England Governor in his speech on Thursday said that he was confident in the UK’s ability to successfully adapt to a future out the European Union in a bid to reassure the markets. The BoE Governor said “The UK can handle change.. It has one of the most flexible economies in the world and benefits from a deep reservoir of human capital, world-class infrastructure and the rule of low. The question is not whether the UK will adjust, but how quickly and how well.”

However, he cautioned that growth in the UK could slow down in the coming months and as a result, further interest rate cuts and other measures would be required. But Carney also warned of the risks of cutting interest rates below zero which he said could perversely reduce credit conditions.

The Bank of England maintained its consistent view. Prior to the June 23rd referendum, the Bank of England warned that growth could take a hit as consumers and businesses respond to the heightened uncertainty by cutting back on spending.

The BoE Governor said that in his personal view, the central bank was more likely to cut interest rates over the “summer.” He said that an initial assessment of the economic damage would be made at the BoE’s July meeting, and a full assessment including new forecasts for growth and inflation would be done in August.

Carney said that the central bank also had other tools in place to support the economy and the banking system in what is being translated to as subtle hints of reviving the BoE’s asset purchase program. Carney said that the Financial Stability Committee which is responsible for setting the banking rules could take action when it meets next Tuesday.

Following Carney’s comments, the British pound fell 1.380% against the US dollar while the FTSE100 soared to close the day with 2.27% gains. UK gilts which were also hit by the Brexit vote fell to record lows of 0.882%

The markets were anticipating rate cuts from the BoE following UK’s decision to leave. In our previous Orbex commentary on Brexit, we noted that a July rate cut from BoE was unlikely and Carney’s views today reaffirm that view. However, an August rate cut still remains questionable and largely dependent on how data emerges from July onwards. Still, the BoE could afford to wait until September or October to wait and fully assess the impact of Brexit. By then the UK is also most likely to elect a new leader and could possibly proceed with furthering negotiations with the EU.

Earlier this week, UK lost its coveted AAA rating by S&P Global Ratings, with Fitch Ratings also lowering UK to AA from AA+. The sterling which previously hit multi-decade lows managed to reverse its losses posting gains for two consecutive days on Tuesday and Wednesday this week. Still many were not convinced of the gains posted by the sterling. Joining the ranks of many other analysts, Rabobank’s Jane Foley said: “[investors are] at risk of failing to face up to the severity of the political and economic issues that now confront the UK.” She said that the British pound could drop sharply against the dollar in the weeks ahead, projecting a $1.24 for the GBPUSD.

Analysts at Scotiabank said “We think downside risks to the [pound] remain significant as the consequences of the referendum outcome become more apparent and politicians do their level best impression of a circus act as leadership battles evolve in the ruling and opposition parties.”

In his speech, Carney said that it would be irresponsible of him to walk away and said that he would not have to resign if Brexit critics lead the government.