BoE's cautious stance makes sense
- Bank of England's unchanged policy was the latest in a string of surprises
- BoE likely to cut rates by 25bp in August
- GBP could return to outperformance as early as Q4
- Japan looking towards 'helicopter money' fiscal stimulus
Unchanged policy for now - but the Bank of England may
be preparing a 25bp rate cut in August. Photo: iStock
By Neil Staines
“It isn’t so much what’s on the table that matters, as what’s on the chairs.” — W. S. Gilbert
It appears to me that the number of events, statements, occurrences and releases that could be considered a surprise (including Boris Johnson’s appointment to the Foreign Office), have risen recently. Yesterday's unchanged policy from the Bank of England was another.
Earlier in the week, we discussed the prospect of a UK rate cut at this week’s Bank of England meeting. We suggested that the cautionary ‘tales of Brexit woe’ for the UK economy (that Mark Carney defended at the Treasury Select Committee meeting earlier in the week) and the explicit warning from Carney that further easing was likely over the summer months, in conjunction with his reputation for pre-emptive monetary activism, pointed to action this week.
“They don’t, they don’t speak for us” — Radiohead, No Surprises
While we suggested that there was a chance that Carney, Vlieghe and Haldane may fail to convince enough for a majority until the full updated (Quarterly Inflation Report) forecasts are available at the August meeting, it appears Carney and Haldane failed to convince even themselves - though Carney, as governor, votes last, so it is possible that he elected not to vote in the minority at this stage.
The surprise, that the sole dissent was for a mere 25 basis-point cut in the bank rate, was mitigated to a certain degree, however, by the pledge that “most of the Committee expect monetary policy to be loosened in August” and that “the Committee discussed various easing options and combinations thereof”.
The Bank’s approach seems very sensible, if cautious, relative to market expectations. Indeed, the statement that “the exact extent of any additional stimulus measures will be based on the Committee’s updated forecasts, and their composition will take into account interactions with the financial system” concurs with our central expectation that the Bank will cut interest rates by 25bps in August, and retain the threat of reopening the Asset Purchase Fund with additional QE later in the year, should it be required.
“To know how to wait is the great secret of success” — Joseph Marie de Maistre
In the near term, it is likely that the UK consumer remains relatively buoyant, as employment remains near record highs, and interest rates near record lows. The biggest potential threat to growth in the medium term, however, will come from business investment spending and how it responds to the uncertainty both in terms of domestic investment and FDI. While the BoE will not have enough time or data to be able to make an assessment of the ‘post Brexit’ trend in business investment, it is likely that we will know who will sit in all the government seats and, hopefully, the government will have at least the basic framework of a plan.
In the March UK Budget, Chancellor George Osborne laid out the government’s plan for fiscal consolidation - deficit elimination by the end of the current parliament. The suggestion from Osborne’s replacement, Philip Hammond, is that there may be some near-term fiscal relaxation, although his current line is that this may not come until the Autumn Statement. While in the near term, the combination of looser fiscal and monetary policy should weigh on GBP (post-relief rally), in the medium term, this could prove very positive for the UK, and for GBP. Regular readers will not be surprised that we are not bearish on GBP, and envisage a return to economic and currency outperformance as soon as Q4, once deferred investment and consumption are put back into the economy.
“The road to success is always under construction” — Arnold Palmer
Standing back from the UK and from GBP, the combination of fiscal and monetary easing is also the core driver of current sentiment in Japan. As monetary policy (conventional and unconventional) reaches its limits, Japan is seemingly looking towards fiscal policy that boosts aggregate demand (helicopter money or perpetual bond purchases) in a monetary-financed fiscal stimulus. There will likely be a lot more discussion on this topic ahead of the Bank of Japan meeting at the end of the month.
If Arrows 1 and 2 are successful in driving inflation expectations up, and driving investors out of domestic assets (as was highlighted in the Japanese capital flow data from the last week - released yesterday), then there is room for the JPY to weaken. Furthermore, if the current backdrop of a stabilisation (resurgence?) in the US economy and the rise in US yields is maintained, any JPY weakness could be exaggerated.
— Edited by D. Deacon
Neil Staines is head of trading at The ECU Group