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The Bank of England is widely anticipated to cut interest rate by 25bps for the first time in nearly seven years in a bid to cushion the UK’s economy from the Brexit shock. The Bank of England’s interest rate is currently at 0.50%, unchanged since March 2009. Expectations are increased after BoE Governor Mark Carney said a few weeks ago that loosening monetary policy including stimulus was on the way in a subtle bid to reassure the markets that the UK’s economy is in safe hands. The BoE’s decision is to be announced at 12 noon.
The Bank of England is also expected to release an initial assessment of its view on the UK’s economy followed by the August meeting where the central bank is expected to release its full assessment and is being seen as an opportunity for expanding its bond-purchase program. Last week, the Bank of England lowered the countercyclical buffer requirements to zero percent from 0.50% in a bid to bring more liquidity and to boost bank’s lending to households and businesses.
While there has been no hard evidence on the impact of Brexit, business surveys show that consumer confidence was at its weakest levels since the 2008 global financial crisis.
David Lafferty, chief market strategist at Natixis Global Asset Management, wrote in a note, “The Brexit vote appears to be having a psychological effect as informal measures of consumer confidence have already fallen precipitously.” He said that following Carney’s argument that Brexit could lead to a recession, it would be hard to justify postponing a rate cut.
On the political front, developments in the UK saw the new Prime Minister, Theresa May being elected in a quicker than expected timeline is expected to remove some of the uncertainty in the UK-EU relationship. Still, the question remains as to when the new PM will be invoking the Article 50 to start the exit negotiations. According to 10 Downing Street, Ms. May was congratulated by German Chancellor Angela Merkel and Francois Hollande, where it is reported that the new Prime Minister reiterated her commitment to leaving the European Union. Following her swearing-in ceremony, the new Prime Minister was quick to reshuffle her cabinet, including replacing George Osborne with Philip Hammond as the Chancellor of the Exchequer.
The British pound which previously posted strong gains to rise above $1.32 gave up some of its gains, with GBPUSD closing the day lower, 0.77% at $1.314.
The UK’s housing market continues to be battered. The latest survey from the Royal Institution of Chartered Surveyors (RICS) showed that there was a significant decline in buyer activity. Estate agents remained more pessimistic about the housing market than before as interest from buyer fell for the third month in a row with respondents saying that there were more than 36% declines, marking the lowest home buying interest since 2008.
Simon Rubinsohn, chief economist for RICS, said, “Big events such as elections typically do unsettle markets, so it is no surprise that the EU referendum has been associated with a downturn in activity.”
