BOE Rate Cut Prospects Rise After Carney, Tenreyro Comments
Bank of England policy maker Silvana Tenreyro said she may support an interest-rate cut in the next few months, another sign that policy easing could happen sooner rather than later after Governor Mark Carney discussed the possibility a day earlier.
Tenreyro suggested she could be persuaded to join the two officials urging the Monetary Policy Committee to bring down the cost of borrowing, particularly if sluggish global growth and uncertainty surrounding Brexit persist. Carney outlined how much room the central bank has if it decides to act in a speech Thursday.
The dovish comments have prompted traders to step up bets on an interest-rate reduction. Money markets are now pricing in an almost 60% probability of a quarter-point cut in May compared with less than 30% on Wednesday. Officials will announce their next decision alongside fresh forecasts on Jan. 30. That will be Carney’s last meeting before Andrew Bailey takes over.
“If uncertainty around the future trade arrangement or subdued global growth continued to weigh on U.K. demand then my inclination is to respond with a vote for a cut in rates in the near term,” Tenreyro said.
In an answer to questions, she clarified that near term means “in coming months.”
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“The past 24 hours have shown the debate on the MPC around the need for stimulus is finely balanced. Tentative signs of a rebound in the data, lower uncertainty and the prospect of a big fiscal boost mean we think the committee will hold fire but the tolerance for downside surprises is clearly low.”
-- Dan Hanson, Bloomberg Economics
The BOE was one of the few major central banks that didn’t join the global monetary policy easing of 2019. Hemmed in by Brexit uncertainty, it held fire through the political battles and tense negotiations. The U.K. finally agreed on an exit deal with the European Union in late 2019, but there’s still the huge hurdle of the future trading arrangements.
Tenreyro has so far voted with the majority of the nine-member MPC in favor of maintaining the benchmark at 0.75%. Her comments suggest she could be persuaded to switch her vote to join Michael Saunders and Jonathan Haskel in their call for a reduction in the benchmark rate.
Carney on Thursday said the central bank has plenty of room for maneuver if it needs it. A combination of rate cuts, more bond buying, and forward guidance gives policy makers the equivalent of a 2.5 percentage point rate reduction, if the benchmark weren’t already so close to zero.
Officials will be looking at surveys of business and consumer sentiment to assess the performance of the economy in the coming weeks before casting their votes. New growth figures are due Monday, with economists predicting gross domestic product flat-lined in November ahead of the general election. PMI data due to be published the week before the BOE’s decision will also be crucial, according to Nomura economist George Buckley, who is predicting a rate cut this month.
“It’s very much in the balance,” Buckley said. “A lot depends on the survey evidence as Carney suggested. If the PMIs don’t show meaningful signs of recovery post-election, that will be a signal that they need to do something.”
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