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Split BOE Decision Wrong-Foots Markets, 2020 Rate Cut Now Seen Likely

"They’re closer to cutting rates than we think".

The Bank of England looks to have wrong-footed some folks on Thursday, as a split decision at November’s policy meeting pushed the pound to the lowest levels since October 29. Gilts trimmed losses and the curve steepened.

The 7-2 split found Michael Saunders and Jonathan Haskel voting for a 25bp cut. They cited Brexit, global risks and the labor market. Those are the first votes for cuts since 2016.

“In October, the UK and EU agreed a Withdrawal Agreement and Political Declaration as well as a flexible extension of Article 50. The perceived likelihood of a no-deal Brexit has fallen markedly [and] these agreements are expected to remove some of the uncertainty facing businesses and households”, the MPC said, but noted that policy easing may be necessary if the Brexit situation takes a sudden turn for the worse or if the global outlook deteriorates. Risks to UK growth are skewed to the downside, Mark Carney reiterated, in his press conference.

Carney also said the agreement on an EU deal has created “the prospects for a pick-up” in growth, but cautioned there are no guarantees. “If we didn’t see the expected reduction in uncertainty and therefore the pickup in activity, or if the global economy weren’t to stabilize, then there may be a need to provide some reinforcement; but that’s not pre-committing to anything”, he went on to explain.

This obviously comes amid rampant uncertainty around domestic politics. Boris Johnson finally managed to engineer an election after failing to pull the UK out of the EU on October 31 as promised.

“Really what matters for gilts is the enormous amount of uncertainty with the election in December [and] some tough decisions on Brexit”, ING’s Antoine Bouvet remarked.

A rate cut in 2020 now looks increasingly likely. Market pricing moved towards a cut by the end of next year in the wake of Thursday’s decision and Carney’s remarks.

The BOE also slashed their outlook for growth and inflation, blaming, in part, headwinds to the global economy. Broadly speaking, the language out of the bank on Thursday contrasted sharply with the prevailing optimism engendered by trade progress.

“They’re closer to cutting rates than we think”, SocGen’s Kenneth Broux told Bloomberg, in an e-mail.


 

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