BoE’s decision not really GBP-positive for the next few weeks - Commerzbank

The Bank of England left its key rate on hold yesterday but announced that it intends to lower it in August. The pound has profited little from this, according to Ulrich Leuchtmann, analyst at Commerzbank this was not only because the rate cut was merely postponed, but also because British policymakers appear less proactive than many had expected.

Key Quotes

“The pound has held up well this week. Yesterday’s decision by the Bank of England (BoE) to leave the key rate on hold against expectations held by most market participants has confirmed this movement. But the effect of this surprising inaction was limited. To a large extent this was because the MPC members practically announced monetary easing for their next meeting (on 4 August). Whether the pound will carry a lower interest rate from now on or starting in August makes little difference for the valuation of the British currency, especially in times when interest rate levels are generally low.”

“But this does not entirely explain the muted reaction of the pound. After all, the money market now also accords a lower probability to a rate cut in August. In fact, another impact channel seems to be at play: Yesterday the BoE missed a chance to be perceived as proactive. Perhaps those market participants who had bet on a rate cut expected too much of traditionally conservative policymakers. After all, no “hard data” is yet available that would confirm the immediate effect of the Brexit vote. The BoE obviously considers the first negative sentiment indicators an insufficient basis for a monetary policy decision.”

“On a medium-term perspective, though, precisely such a proactive course of action might have helped the pound more than the cautious one the BoE chose yesterday. The sooner the BoE steers in the opposite direction, the less likely will it appear to the market that the impending Brexit will sharply dampen economic activity. But if the central bankers at Threadneedle Street want to wait each time until negative consequences are reflected in “hard data”, the risk of such negative consequences will increase – in the worst case to an extent that would later have to be addressed using even more aggressive means. As absurd as it may sound: The BoE’s decision is therefore not really GBP-positive for the next few weeks.”