Investors See Little Reason to Buy Pound (GBP) as Bank of England (BoE) Remains Cautious
UPDATE: As was widely expected, the Bank of England (BoE) left UK interest rates frozen in its September policy decision.
Investors were, however, slightly concerned about the bank’s latest comments on the Brexit process impacting business uncertainties, and fears of how US trade protectionism could compound those uncertainties.
The Bank of England further noted that its concerns about the potential impact of a US-sparked trade war had risen since August.
This made investors hesitant to buy the Pound, with the BoE essentially indicating that it would remain cautious at least until key uncertainties had been resolved. With Brexit negotiations accelerating, that may not be for a couple of months at least.
Investors Eager to Assess Bank of England’s (BoE) Tone on Brexit as Interest Rates Expected to Remain Frozen
The Bank of England (BoE) is set to announce its September decision on UK monetary policy at noon today, but as the bank is expected to leave monetary policy frozen, what could it do that would affect financial markets, the Pound (GBP), or you?
Financial markets broadly expect the Bank of England to leave UK interest rates frozen today, meaning there may not actually be much reaction to the bank’s rate decision itself.
Furthermore, investors have already reacted to news that BoE Governor Mark Carney will be staying on at the helm until January 2020. This news had little impact on markets overall, as many investors already assumed Carney’s term would be extended.
It was only last month that the Bank of England hiked UK interest rates. And being only the second time since the financial crisis ten years ago it would be extremely surprising if they were to rise again only a month later.
UK data has been fairly solid recently and this was used to justify the August interest rate hike. George Buckley, an economist at Nomura, explained why this was not enough to influence a change in tone from the bank, though:
‘The month after a decision, the data are not going to be sufficiently different to get the MPC to move the needle on their anticipated course of policy action.’
Instead, investors will be looking to assess the bank’s attitude in the meeting minutes from the Monetary Policy Committee (MPC), published alongside the announcement.
The tone the bank takes on topics including the current pace and progress of Brexit negotiations is most likely to prove influential. This may cause a shift in market speculation about the UK economic outlook and the bank’s plans.
How Brexit Negotiations Could Influence the Bank of England’s Outlook
When can we expect the next action on UK monetary policy to take place? Amid uncertainties about what kind of Brexit deal the UK is heading towards, analysts predict the bank will be hesitant to make any big moves until more clarity is offered.
In fact, most analysts believe the central bank is unlikely to touch UK interest rates again until after the UK has begun to formally leave the EU. According to Howard Archer, Chief Economic Adviser at the EY Item Club:
‘We do not expect any more (rises in) interest rates until after the UK leaves the EU in March 2019, given the major uncertainties that may occur in the run-up to the UK’s departure.’
The Bank of England is almost as in the dark regarding the success and angle of Brexit negotiations as the public.
With uncertainty still high as to what Britain’s relationship with its biggest trade and business partners in the EU will even look like under a year from now, all the bank can do is prepare and be patient. According to Adrian Paul from Goldman Sachs:
‘Brexit negotiations are set to intensify,
In our view, the macroeconomic implications of a disorderly Brexit mean that the MPC, for now, has little to do but wait.’
The Bank of England is keeping its options open, and has indicated in recent months that in the event of a ‘no-deal Brexit’, a UK interest rate cut may be just as likely as a rate hike.
Saying that, the bank projects that there will be more rate hikes in 2019 in the event of a seamless break with the EU. Some investors are speculating that the bank could even hike rates soon after the Brexit process takes place, in the first half of 2019.
What Does This Uncertainty Mean for the Pound?
By this point, it’s no surprise that the Pound (GBP) has been severely undermined by market disquiet about how the UK economy could be impacted by Brexit.
Sterling’s movement has been almost dominated by Brexit developments since mid-2016, and that’s likely to continue at least until the outcome of Brexit negotiations is set in stone.
As usual though, the Bank of England’s (BoE) actions and tone on monetary policy have played a part in the Pound’s strength.
Investors have been hesitant to buy the Pound too much on the bank’s recent cautious optimism, due to concerns that UK-EU negotiations could still collapse and lead to a ‘no-deal’ Brexit.
However, this means that if the bank were to indicate that markets are overblowing their Brexit concerns, or that another UK interest rate hike is on the way sooner than expected, the Pound is likely to surge.
These actions would indicate to investors that the bank is confident a smooth Brexit is more likely than ‘no-deal’, which would make the Pound more appealing.
Of course, in the end, the way UK-EU Brexit negotiations unfold towards the end of 2018 will have the most impact on both the Pound and the Bank of England’s monetary policy outlook. In other words, we’ll have to wait and see.