BOE’s Hawk-Turned-Dove Is Starting to Sound Like the Fed on Cuts

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Bank of England policy maker Michael Saunders’s shift from hawk to dove resembles the Federal Reserve’s turnaround on the need for interest-rate cuts, according to BNP Paribas SA.

In a speech on Friday, Saunders, who helped lead the charge for the BOE’s last two rate hikes, changed tack and said the institution may have to cut interest rates even if the U.K. avoids a no-deal Brexit. He also stressed that the uncertainty shouldn’t be a “recipe for policy inertia,” and officials should be nimble in their response to Brexit, even if it requires a reversal once the outlook changes.

Saunders previously said that the bar for a rate cut was higher in the U.K. than elsewhere. The U.S. central bank has called its recent cuts insurance against risks, rather than the start of a deep easing cycle.

Saying that “the risk of acting and having to reverse course may be lower than the cost of inaction” is similar to the Fed, said Paul Hollingsworth, a U.K. economist at BNP. “The need to be ‘nimble’ also sounded Fed-like.”

Saunders’s comments sent the pound lower, and prompted money markets to bring forward bets on a rate cut. Investors are now fully pricing a quarter-point rate cut in August 2020, from December 2020 on Thursday.

However, in the near term markets see the Monetary Policy Committee holding fire. Prime Minister Boris Johnson says the U.K. will leave the EU with or without a deal on a transition on Oct. 31, even though Parliament has legislated to force a delay if no deal is reached.

“The fact a more hawkish member has shifted, tilts more toward the easing side,” Hollingsworth said. “The market is pricing in only slightly more than a 30% cut in December, so it seems at the moment, markets are either optimistic that a Brexit deal will be struck in the near term, or they don’t think that the MPC are quite ready to ease.”

Saunders’ shift will be welcomed by some traders, who have been loading up on bets on aggressive easing by the BOE. While the options buying may be an effective hedge against a no-deal exit that pushes the central bank to cut interest rates, the comments Friday suggest they could pay out even if Brexit is delayed or a last-minute agreement is reached.

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