Analyst Reactions to Bank of England’s Super Thursday
- Written by: Gary Howes
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Pound sterling was a winner of what was arguably the most anticipated Bank of England Inflation Reports of recent times, however don't expect an all-out recovery just yet warn analysts.
Interest was more elevated than usual as we are mere weeks away from the EU referendum which will shake up financial markets and the economy whatever the outcome.
The main point to note was the slight cut to 2016 growth forecasts to 2% from 2.2%; it could have been worse and the pound rallied in relief.
Above: The Monetary Policy Committee at the Bank of England. Pic by: James Oxley
Front row (left to right): Nemat (Minouche) Shafik - Deputy Governor, Markets & Banking, Ben Broadbent - Deputy Governor, Monetary Policy, Mark Carney - Governor, Sir Jon Cunliffe - Deputy Governor, Financial Stability
Back row (left to right): Andrew Haldane - Executive Director, Monetary Analysis & Chief Economist, Martin Weale - External member, Dr Gertjan Vlieghe - External member, Ian McCafferty - External member, Kristin Forbes - External member.
All nine members of the Monetary Policy Committee continued to vote to keep rates on hold.
The pound caught a bid on relief that speculation that Shafik and Haldane did not vote for a rate cut.
Sterling rose to above 1.45 against the dollar and 1.27 against the euro.
The inflation outlook remains the same and the UK should see 2% inflation in 2018 suggesting pound-supportive interest rates will occur in the interim.
With regards to sterling the Bank has judged that the currency is 9% weaker than it would be were it not for the impending vote on EU membership.
Governor Ben Broadbent told journalists in the press conference following the release of the minutes that the pound could fall in excess of 3% were the Out vote to win the day.
He was however not willing to set any specific targets.
Here are the latest reactions from the analyst community to what has undoubtedly been an interesting day for the markets.
- Nawaz Ali, UK Currency Strategist at Western Union Business Solutions (UK) Ltd:
“With the Bank of England expecting ‘off-line’ economic activity to come back on-line after a potential STAY vote on June 23, this anticipated ‘stimulus boost’ to the economy is why we could see a 3-5% relief-rally in the Pound back towards the $1.48-$1.50 range against the US doll
- Vicky Redwood, Chief UK Economist at Capital Economics:
“The MPC sounds a warning about the potential adverse effects on the economy of a Brexit, but nonetheless continues to indicate that markets’ interest rate expectations are too low.
“The forecasts are based on market expectations for rates not rising until the start of 2019 – note that the MPC has not adjusted these for Brexit uncertainty.”
- Lloyds Bank Commercial Banking:
“In a repeat of a change also seen in February, on the BoE’s alternative projections based on unchanged interest rates at 0.5%, the inflation overshoot at both the 2- or 3-year horizons was pared back further.
“Movements in the market interest rates used as the conditioning assumption aside, that again indicates a reduced urgency to tighten policy at all – a policy inclination that feels consistent with our expectations that the MPC will not be able to muster a hike until late 2017, well beyond the consensus of economists’ forecasts.”
- Andrzej Szczepaniak at Barclays:
“Like us, the MPC expects economic activity to reaccelerate in the event of a vote to remain in the EU, after further slowdown in Q2.
“However, we believe the slowdown in the three months prior to the referendum is likely to be more pronounced than the Committee envisages: we see growth falling to 0% q/q in Q2 while the BoE forecasts 0.3% q/q.”
Petr Krpata at ING:
"In its April Inflation Report yesterday, the BoE revised down its GDP forecast (acknowledging that the recent softness in data was due to the Brexit uncertainty), slightly nagged up the inflation profile and acknowledged that Brexit is the key risk to its overall forecast, with the UK leaving the EU leading to a rise in the risk premia, weighing on capital flows and possibly leading to a technical recession.
"While GBP strengthened yesterday following the MPC warning, we continue to expect GBP to come under pressure ahead of the referendum date and GBP risk premia start being re-built into the currency."
