Bank of England On Hold Until November

Bank of England, On Hold, Until, November, Monetary Policies, fx trader, forex

14 Oct 2016

After seven years of holding rates at 0.5% the BoE had finally decided to cut rates to 0.25% at the August meeting stating the Brexit would have deep consequences. Maintaining rates on hold for seven years did not mean that everything was great. In our view, the global economy was largely slowing down and the road towards negative interest rates was already started since 2008. This is why blaming the sole Brexit Referendum for further economic difficulties was not exactly true.

The BoE’s Monetary Policy Committee introduced at that moment new measures to get back towards the inflation path of 2%, in particular the purchase of £10 billion corporate bonds and £60 billion in domestic government bonds. It is worth saying that this is actually the usual monetary policy tools used by most of the major central banks.

Earlier this September and as we surmised, the Bank of England has kept rates unchanged at 0.25%. The meeting minutes show that policymakers voted unanimously to hold the bank rate at this level. In addition, there were no changes made to monetary policy and the UK government bond purchases of £60 billion will continue. The asset purchases still amount for £435 billion.

There was no urgency for BoE officials to decrease rates as we believe that policymakers have ironically gained some time with the Brexit referendum. Indeed, the market’s reaction has sent the pound very low, it having lost 15% of its value against the dollar, which has boosted the UK economy, particularly exports. The latest data shows that UK goods exports rose 3.4% in June. In particular, exports towards the EU have risen 9.1%, representing the biggest increase since October 2010. In our view, financial markets have largely overpriced the Brexit consequences. By the way, retail sales continue increasing albeit at a slower pace and UK tourist spending saw a sharp increase of 7% for July.