BOE August Meeting Summary
At their August meeting, which saw the bank unrolling easing measures across all four channels, the BOE noted that the majority of MPC members expected to vote for further easing in the near term. The bank also noted that their economic outlook had “weakened markedly” in the wake of Brexit.
The BOE’s actions came as a surprise to markets who were mainly expecting the bank to ease through the interest rate channel with a small portion of analysts expecting QE. However, the BOE eased across all four channels cutting the headline rate by 25bps, expanding QE to run at £60bln for 6 months, a corporate bond buying program to run at £10bln for 18 months and also a term funding program.
The bank also revised lower their growth forecasts in the wake of Brexit from 2.3% to 0.8% in 2017 and 2.3% to 1.8% in 2018. Inflation, however, was forecast to pick up due to the weaker pound with the bank expecting CPI to hit 2.1% in 2017 and 2.1% in 2018 with measures intended to ensure that inflation doesn’t fall below the minimum target.
Carney Rules Out Negative Rates
In terms of forward guidance, Carney noted that the majority of MPC members expected to vote for a subsequent rate cut though Carney did specify that he “is not a fan of negative rates” and that the lower bound for UK rates is “close to, a little above zero.”
Despite the bank’s large easing package and indications of further easing to come, GBP was unable to break post-Brexit lows and a week after the meeting reversed to trade back up to the pre-August BOE level.
UK Data Firm Post-Brexit
The driver behind this reversal has been a steady stream of positive UK data which flies in the face of initial bearish forecasts based on Brexit. Inflation has remained firm over the last few months with July CPI rising to three-year highs of 0.6% and 1.3% on the core reading. These readings remained unchanged over August, highlighting stickiness in inflation.
Alongside firm inflation readings, we have also seen a strong rebound in PMI data sets over August with Manufacturing PMI hitting a 10 month high and the Services sector PMI registering its biggest month on month change in the history of the Survey.
Yesterday we saw the release of the first earnings and employment data to reference the post-Brexit period and once again, bearish forecasts were confounded as the Unemployment rate remained steady at lows of 4.9% and wage growth printed firmly at 2.3% against expectations of 2.1%.
BOE To Keep Powder Dry
Considering the resilience of these economic indicators in the wake of Brexit it is unlikely that the BOE will look to utilize and of the easing maneuvers that remain. The BOE noted that the lower bound for rates is “close to, a little above zero” and with rates at .25bps currently, there isn’t much further to go.
Considering this, it seems prudent to expect that the BOE will look to allow more post-Brexit data to be assessed before any further easing in case these indicators start to weaken into the year end.
Article 50 has yet to be triggered, and UK PM Theresa May says that it will not be triggered before year-end at the earliest. It is likely that investor uncertainty will build again into the year-end and the start of exit negotiations. With this uncertainty on the horizon, it is likely that the BOE will want to keep their powder dry to deal with any economic downturn that occurs in the medium term.
For now, the BOE are likely to deliver quite a neutral statement today, noting positivity around recent data, but highlighting their readiness and capacity to act if needed. The currency reaction to today’s meeting will be driven by the tone of the forward guidance given by the BOE.
Impact on GBP
If the market gets the sense that the BOE is moving away from earlier signals of further easing to come then, we likely see quite a sharp move higher in GBP. Despite recent reductions, the net short position in GBP remains at record levels, and there is plenty of room for further position squaring to lead a move higher.
If however, the bank chooses to keep a more reserved tone, noting the likelihood of further easing then we can expect GBP to remain under pressure though for now, it seems there is more upside risk to this meeting than downside.
For now, GBPUSD has just retested the underside of the broken bullish channel support line. Key structural resistance sits at the September high around 1.3446 whilst structural support comes in at the late August low of 1.3050/80.