The volatility was particularly prominent immediately after Mark Carney’s speech at the Bank of England in which he confirmed that the Monetary Policy Committee had agreed to lower the base interest rate to an historic low of 0.25%.
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The central bank further announced a program of cheap lending to banks to make sure they are financially able to in turn lend to people and businesses at low rates. The markets have reacted more cautiously to sterling, especially to the announcement of an extra £60 billion of quantitative easing, and £10 billion more on corporate bonds, increasing the money supply forcing downward pressure on the pound. The bank predicts the amount of money lent through this facility could reach about 100 billion pounds. The MPC initially had to weigh up risks crystallising from the Brexit confidence shock versus little post-referendum economic data.
Consumer confidence, services output and purchasing-manager sentiment has plummeted.
“At its meeting … the MPC voted for a package of measures created to provide additional support to growth and to achieve a sustainable return of inflation to the (2.0-percent) target”, the bank said.
“Following the United Kingdom’s vote to leave the European Union, the exchange rate has fallen and the outlook for growth in the short to medium term has weakened markedly”, a statement by the BOE said, blaming Brexit in part for the country’s economic woes. Chief economist Andy Haldane has said he’d rather use a “sledgehammer to crack a nut”, while Kristin Forbes has publicly backed a cautious approach.
Meanwhile, the PBOC sets the reference rate of the yuan against the pound at 8.7147, stronger by 1,391 basis points.
Yields on eurozone bonds such as German bunds also tumbled on Thursday as bond prices rose after the BoE news.
The Bank yesterday (4 August 2016) slashed interest rates to 0.25 per cent, the lowest in its 322-year history. The number of Americans collecting unemployment benefits has fallen more than 5 percent in previous year, but the pace of hiring and economic growth slowed in the first half of 2016.
It has reduced its growth prediction for 2017 from the 2.3% it was expecting in May to 0.8%. The weaker pound makes imported goods more expensive, pushing up inflation.
Growth this year was forecast at 2%, unchanged from May’s outlook after a much stronger than expected second-quarter growth figure made up for a slowdown after the European Union referendum.
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The British pound traded at $1.3325, keeping some distance from its three-decade low of $1.2798 hit nearly a month ago, although currency markets may be somewhat ambivalent over how to react to the BoE decision – buy sterling if the BoE cuts, sell if it doesn’t, or vice versa? Seven out of eight sessions, with the slight declines, gold closed higher. It is down 6.00% since July 5, 2016 and is uptrending.
