Surprise! No Rate Cut From Bank of England

15.07.2016 • Gold and Natural Resources

From Merryn’s Blog-

So the Bank of England (BoE) didn’t cut rates – despite the market giving a cut of 0.25% an 80% chance. Why?

The first obvious reason is inflation – the recent fall in the trade-weighted value of the pound will obviously slightly increase the risk of more appearing (note by the way that the consumer price index (CPI) has risen by over 17% since 2009 – inflation is notdead).

However, the second reason is more interesting. Perhaps the BoE, now the scaremongering phase of the Brexit referendum is over, is admitting internally at least that it really isn’t the end of the world – they won’t actually know the extent to which the vote has affected the economy (for good or bad!) until they have some data from the post-vote period. Or, as the analysts at State Street put it: “there is some uncertainty as to how rapidly the economy will actually slow” as a result of Brexit.

This is, we think, pretty good news. The BoE is no longer making unsubstantiated assumptions about the future – it is noting that the UK is extraordinarily politically stable and waiting to see how the growth and inflation data changes first.

The City, unfortunately, isn’t taking the same small steps towards rationality. 100% of the press releases we have received so far assume that there will be fast deterioration towards the end of the year; that the deterioration will be 100% Brexit related; and that the BoE will ‘cut aggressively’ in August as a result. We wonder.

Like many people, we aren’t convinced that loose monetary policy is working – and we would also say that the BoE does still have an inflation mandate. Inflation has spent nearly 70% of the last decade above 2% (Pantheon Economics) and if rising import prices now mean that inflation forecasts surge into the 3% range will Mark Carney really feel comfortable cutting the UK base rate to almost zero?

There is no accounting for the behaviour of central banks these days and, under the circumstances Carney won’t want to disappoint the market too much. But an aggressive cut combined with a round of QE surely isn’t as much of a given as the market expects.

-Read more at moneyweek.com (English)-

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