What’s The BoE To Do?

The Bank of England (BoE) is expected to cut its benchmark interest rate to a new record low (+0.25%) tomorrow, or at the very least send a strong message to the market that a cut is imminent now that the U.K electorate has voted to leave the EU.

BoE’s Governor Carney has been front and center ever since the historic Brexit result, on hand with enough liquidity should the financial market require it to fulfill a smooth transition during this time of political and economic unrest. Carney has never been shy in telegraphing the “old lady’s” intentions of possible rate cuts and other measures to lend support to a struggling economy.

Despite the BoE’s blatant overtures, U.K policy makers note that a rate cut or the perception of a future cut may not necessarily offset the current economic uncertainty following the surprise June 23 outcome. Nevertheless, the BoE’s ‘potential’ response to the vote would suggest that U.K officials continue to see economic challenges ahead.

Yesterday, Governor Carney indicated that some of the risks to the U.K’s financial stability identified before the vote have begun to materialize, citing the tumbling pound (£1.3271) and a freeze in real-estate deals. Despite being criticised of scaremongering, the governor remains convinced that the Brexit result could cast a cloud of uncertainty over the economy, slow spending and future investments.

The BoE is more than ready to lend support this week, however, the smart money is looking towards August 4th as the preferred date to inject support. This Thursday may have come too soon for the BoE’s MPC. It’s being suggested that in a number of weeks, U.K officials would be better equipped with new data as well as a fresh batch of quarterly forecasts for growth and inflation to support any change to current monetary policy.

The ‘doves’ would argue that there is little sense in delaying the inevitable, especially given the signs that the U.K economy was slowing before last months vote. Futures prices suggest that an August 4 cut is a safer choice, giving Carney and his colleagues enough time to assess the situation.

There are limitations to what the Bank of England (BoE) can do to shore up investor confidence – cut rates to new historic lows (+0.25%) and/or increase QE – but, will it be enough?

The BoE has no political affiliations; it is a stand alone, unbiased institution that cannot affect the political ills that the U.K is currently experiencing.

Despite Carney being widely criticized over his warnings in advance of the referendum that an economic slowdown and turbulence in financial markets would follow, the Governor remains steadfast that some policy action is required.

The BoE has not changed key lending rates in seven-years, and it was only 14-months ago that money markets were anticipating that the BoE would be the first of the Tier I central banks to hike rates.

How aggressive U.K officials need to be to follow the negative interest rate policy (NIRP) of other European central banks, only time will tell. A deep cut is highly unlikely given the fact that the governor has expressed doubts about the effectiveness of “negative rates” in boosting inflation, but a cut is warranted, it’s just a matter of when?

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