The pound soared on Thursday (14 July) after the Bank of England (BoE) caught investors and economists by surprise as it opted to kept interest rates unchanged.
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“During this period of economic upheaval, SMEs and consumers alike should remain steadfast about the United Kingdom economy and have confidence that it will recover in the longer-term”.
‘Early indications from surveys and from contacts of the Bank’s agents suggest that some businesses are beginning to delay investment projects and postpone recruitment decisions’. “A composite gauge of economic uncertainty, which pulls together various measures of financial market, real economy and sentiment indicators has risen to its highest since 2011”. “Even with that, it’s clear that the market is still running significant sterling shorts and some of these will be squeezed further ahead of next week’s United Kingdom data”, he said, referring to bets an asset’s price will decline.
The British Pound may well continue its recent recovery against the U.S. Dollar, at least to the $1.35 area.
One MPC member, Gertjan Vlieghe, dissented from the move to keep the BOE’s benchmark rate unchanged, expressing a preference preferring instead to cut it immediately and augment that effort with further stimulus in August, according to minutes of officials’ deliberations.
But the minutes of the MPC meeting showed the economy had been resilient in the run-up to the vote, with the Bank now expecting second-quarter growth to pick up to around 0.5 per cent, from 0.4 per cent in the previous three months. He did not rule out the possibility of an economic slowdown but said the new government would do “whatever is necessary to keep the economy on track”. The next Inflation Report is due on August 4.
However, Angus Armstrong, director of macroeconomics at the National Institute of Economic and Social Research, was more critical: “The lack of clear direction is more likely to add to economic uncertainty and therefore be detrimental to demand and the economy”.
‘Rising tensions with Europe are also likely to weigh on the pound after what could be a short-lived honeymoon for prime minister Theresa May’.
“The exact extent of any additional stimulus would be based on the Committee’s updated forecast”, the Bank said.
Most economists taking part in a Reuters poll had expected the central bank to halve its Bank Rate to 0.25 per cent in order to cushion the economy from the shock of the Brexit vote.
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Jeremy Stretch, an FX strategist at CIBC capital markets, has suggested there is pressure on the BOE to follow-through with Carney’s pledge to cut interest rates at his June 30 speech.
