After much anticipation, the Bank of England refrained from cutting interest rates in its latest monetary policy decision, sending the Pound surging versus peers after disappointing expectations. Going into the week, many market participants were convinced that the Bank of England would slash interest rates by 25 basis points in an effort to ease lending conditions and further support the economy which is potentially approaching a recession. However, as the MPC decision shows, only one member was in favor of lowering rates at this juncture out of the nine possible votes. Nevertheless, even though they opted to hold firm on their stance at this point in time, they did open the door for a rate cut in August when the decision coincides with a new round of forecasts and the upcoming inflation report. More specifically, they mentioned that they are already anticipating loosening policy in August. This could either mean an interest rate cut, additional asset purchases, or a combination of both measures.
The most important takeaways from the statement are not only the outlook for monetary policy, but also the changes in sentiment, both for households and businesses. Although no data is available yet regarding the financial impact of the “Brexit” referendum and subsequent results, sentiment has undoubtedly been negatively affected by the decision. Businesses have postponed investments and hiring while individuals have delayed purchases as everyone waits for the dust to settle. Now that Theresa May has taken the helm as Prime Minister, she is already steaming ahead, appointing Boris Johnson, a major leave proponent as the Foreign Minister and the likely individual to lead the negotiations. For now, Sterling has responded very positively to the decision, with GBPUSD climbing over 200 pips after the announcement before pulling back modestly to just under 1.3400. However, although positivity in the Pound is prevailing at the present, that optimism and momentum higher could quickly shift as more hints are dropped about the future of monetary policy and how the economy is behaving in a post-referendum environment.
Pound Surges on BoE Decision to Keep Rates Steady
Market Trends - 14/07/2016