Tags: Bank of England | Brexit | EU | rates

Bank of England Cuts Rates to Help UK Cope With Brexit

Bank of England Cuts Rates to Help UK Cope With Brexit

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Friday, 05 August 2016 10:27 AM Current | Bio | Archive

It was really interesting to see how markets got somewhat surprised by an aggressive Bank of England that cut its interest rates by 25 basis points to an all-time low of 0.25 percent that never was reached since 1694, which was the year the BOE was established. By the way, the oldest central bank in the world is the Sveriges Riksbank of Sweden that started its operations in 1669 and the Bank of England is the second oldest one.

The BOE’s move to ease its monetary policy in an attempt to reduce the uncertainty that has come to the UK after the EU referendum on June 23 resulted in a leave vote favoring the UK leaving the European Union.

Bank of England Governor Mark Carney said at the press conference the decision to leave the European Union marked a regime change and some of the adjustments could be difficult and take time. Nevertheless he also added the BOE Monetary Policy Committee (MPC) could help as monetary policy can support the necessary adjustments of the UK economy during a period of heightened uncertainty.

Interestingly, the BOE’s August ‘Inflation Report’, which is always an interesting source for information, does not explicitly point to a long period of negative growth and in fact confirms the most recent IMF World Economic Outlook (WEO) that was released about one month after the Brexit vote.

In its Monetary Policy report the BOE says, “… recent surveys of business activity, confidence and optimism suggest that the United Kingdom is likely to see little growth in GDP in the second half of this year. These developments present a trade-off for the MPC between delivering inflation at the target and stabilising activity around potential.

For investors it is important to take notice of what the BOE says specifically about the British pound and inflation in its Monetary Policy report, “The fall in sterling is likely to push up on CPI inflation in the near term … the MPC judges it appropriate to provide additional stimulus to the economy, thereby reducing the amount of spare capacity at the cost of a temporary period of above-target inflation. Not only will such action help to eliminate the degree of spare capacity over time, but because a persistent shortfall in aggregate demand would pull down on inflation in the medium term, it should also ensure that inflation does not fall back below the target beyond the forecast horizon. Thus, in tolerating a temporary period of above-target inflation, the Committee expects the eventual return of inflation to the target to be more sustainable.”

No doubt the UK will allow a weaker British pound and cause hereby higher inflation and succeed.

Maybe it’s good to recall that quantitative easing (QE) as it is at present applied under the conditions of Japan and the Euro area has very little possibility of success when inflation remains close to zero.

This will not be the case in the UK, which is by the way the world’s fifth economy and the second economy, after Germany, in the European Union.

That’s why what happens in the UK is important for everybody.

In the U.S. it’s non-farm payroll day, on which media will pay a lot of attention and where media focuses, markets tend to follow. Job growth should be, most probably, above the 60,000 mark, which is the level economists consider as the so-called break-even rate of payroll growth. I know this number is a lot lower than most investors realize and a lot lower than the break-even minimum number that was required in the past.

Tightening of the labor will result in higher wages, as is already the case and higher wages will put pressure on inflation, and because of all that, it will become clearer by the day that the Fed is behind the curve, where it cannot remain forever.

With what we know so far, I think it is for the investor safe to expect and adjust his/her investment decisions taking into account one Fed rate hike of 0.25 percent this year and two in 2017, which is of course not written in stone.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

 

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It was really interesting to see how markets got somewhat surprised by an aggressive Bank of England that cut its interest rates by 25 basis points to an all-time low of 0.25 percent that never was reached since 1694.
Bank of England, Brexit, EU, rates
718
2016-27-05
Friday, 05 August 2016 10:27 AM
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