Bank of England on the verge of first interest rate cut since 2009

  • Blog
    Blog|Currency Updates
    Blog|In The News
    Blog|International Trade
    Charities & NGOs
    Currency Updates
    Currency Updates|In The News
    In The News
    In The News|Press
    International Trade
    Press
  • Latest

14 July 2016

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Currency markets continue to be dominated by developments in the UK following last month’s Brexit vote.,

I
nvestors are now looking firmly to the Bank of England, which will be announcing its interest rate decision and releasing the minutes from its two day monetary policy meeting at midday today. Financial markets are now pricing in the first interest rate cut in the UK since March 2009.

The Bank of England clearly has a big job on its hands following last month’s Brexit vote as it seeks to support domestic consumption, shore up confidence and prevent an economic downturn from taking hold. Even before the surprise referendum result the most recent PMI’s this year had slumped.

Economists appear split down the middle as to whether we’ll see immediate action from the Bank of England today, although the general consensus still points towards a 25 basis point cut at either the July or August meetings. Market implied probability of a cut today remains very high at just shy of 80%.

We stand by our call that the Bank of England will lower its benchmark interest rate today by 25 basis points to a new record low 0.25%, and won’t be at all surprised if we see rates brought all the way down to zero. This could lead to further downside risk for Sterling, which earlier in the week hit a fresh 31 year low against the US Dollar.

Ahead of today’s announcement, Sterling fell across the board yesterday on David Cameron’s last official day as Prime Minister. The Euro rallied to a near one week high despite a fairly dismal set of industrial production figures. Meanwhile, the Japanese Yen strengthened on a dimming risk appetite following another set of poor trade figures in China, and the Bank of Canada held rates steady, causing investors to unwind bets that the central bank could cut this year.

Major Currencies in detail:

GBP

The Pound’s run of gains against its major peers was ended yesterday as investors took up positions ahead of today’s BoE meeting. Sterling fell 0.5% against the US Dollar.

Yesterday was fairly light in terms of market moving announcements, with the newswires dominated by political developments as David Cameron officially resigned as leader of the Conservative Party and Prime Minister.

New Prime Minister Theresa May wasted little time in naming the main members of her cabinet last night. Popular former London Mayor, Boris Johnson, will take on the role of foreign secretary, while Philip Hammond was announced as George Osborne’s replacement as Chancellor.

The Bank of England will dominate today. Close attention should be paid to not only the rate decision itself, but also the tone of the minutes and voting pattern among the nine member strong committee.

EUR

The Euro ended 0.5% higher versus the USD on Wednesday.

The single currency appears to have reverted to trading within a relatively narrow band against the US Dollar since the Brexit vote, with investors waiting for an indication as to the next monetary policy actions from both the ECB and the Federal Reserve.

Yesterday’s rally came despite another poor set of industrial production figures. Production declined by 1.2% in May, giving back almost all of the gains made in the month previous. Such weak data continues to cast doubts over the strength of the economic recovery in the Euro-area. On an annualised basis production declined more than expected to just 0.5% from a revised 2.2%.

With no economic data out in the Eurozone today, all attention will be on the Bank of England meeting.

USD

A drop in investors’ appetite for risk sent the US Dollar index 0.2% lower yesterday.

Another Federal Reserve member, Dallas Fed President Robert Kaplan, spoke on Wednesday warning that an economic slowdown in China and the Brexit vote warranted a more gradual and cautious approach to tightening monetary policy in the US.

In terms of economic data, import price inflation rose in June, although less than expected, by 0.2%. Export prices, however,showed a surprise increase of 0.8%.

Today is similarly light in terms of economic data, with investors awaiting Friday’s retail sales figures. The producer price index at 1:30pm UK time today will be the only major release.

Receive these market updates via email