As expected, the Bank of England announced its unanimous decision today to keep rates unchanged at 0.75%. After raising rates last time around, the bank signaled that it was unlikely to raise rates again until after Brexit, given the uncertainty around it, and was keen to highlight the risks and challenges it presents.
This time, the BOE expanded on its message around Brexit saying “Business investment has been more subdued than previously anticipated, as the effect of Brexit uncertainty has intensified.” However, the bank did also add that “Under the smooth transition assumption on which the forecast is conditioned, greater clarity is expected to emerge over the coming months, boosting investment growth.”
Trade War Risk Flagged
Brexit was not the only risk factor flagged up as the bank spelled out the risks from the ongoing trade disputes affecting the global economy saying
“The global economy continues to grow at above potential rates, supporting UK net trade. Growth has softened, however, and become more uneven across countries, and downside risks have risen.
Global financial conditions have tightened, particularly in emerging market economies, and activity has slowed in the euro area. Trade restrictions have increased and there is a risk of further escalation.”
Further Hikes To Come
However, the general tone of the statement was constructive and GBP traded higher in response to the meeting as the bank reaffirmed its message that further rate increases will be necessary, saying
“Over the past few years, our economy has needed interest rates to stay very low as we recovered from the global financial crisis.
But things have been changing. Our economy now needs a little less support because it is growing a little faster than it has capacity to and inflation is above our 2% target. To ensure a sustainable return of inflation to the target, we need to keep the economy growing at around its speed limit.That is why we raised the official interest rate from 0.5% to 0.75% in August.
After raising interest rates in August, this month we have left them unchanged. If the economy performs as we expect, we think we will need to raise interest rates a bit more over the next few years. We expect any rises in interest rates to happen at a gradual pace and to a limited extent. Interest rates are likely to remain substantially lower than a decade ago.”
Brexit Could Mean Rate Cut Instead of Rate Rise
Again, the key issue of Brexit remains, and the bank has signaled its intent to continue tightening policy if the economy and Brexit meet its projections. However, it did add the caveat that, should things turn out badly with Brexit, it stands ready to buffer the economy again adding:
“The implications for the appropriate path of monetary policy will depend on the balance of the effects on demand, supply, and the exchange rate. The MPC judges that the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.”
Essentially, the BOE is saying that it could just as easily end up cutting rates post-Brexit, as raising them depending on the outcome.
For now, GBPUSD continues to trade within the broad bearish channel that has framed price action since the sharp decline which began earlier in the year. However, price has held a subsequent test of the rising trend line from 2016 lows, just above the year to date low of 1.2658. We could be looking at a double bottom here which would pave the way for a recovery higher, though we will need to see the break of the bearish channel resistance line to gain any traction with this view.