Markets Take BOE Shift in Stride as Election Overshadows Policy
Markets Take BOE Shift in Stride as Election Overshadows Policy
U.K. markets often dance to the Bank of England’s tune but traders currently have such an intense focus on politics that they barely moved on a sudden shift toward a cut in interest rates.
The pound did fall as much as 0.5%, yet that was only the biggest move since Monday, while U.K. bonds failed to shrug off earlier losses. Two BOE policy makers voted to back an interest-rate cut Thursday, after few surprises had been expected from the meeting given the winner of a December election may significantly change fiscal policy and the course of Brexit.
“It is hard for the BOE, and the market, to clearly take a view either way,” said Antoine Bouvet, a senior rates strategist at ING Groep NV. “Really what matters for gilts is the enormous amount of uncertainty with the election in December, some tough decisions on the withdrawal deal, Article 50 extension, transition period, extension etc. etc.”
Governor Mark Carney acknowledged the bank’s forecasts could change along with government policy after the Dec. 12 vote. Both of the U.K.’s major parties rolled out big budget plans in their election campaigns on Thursday, with the ruling Conservatives planning to borrow about 20 billion pounds ($26 billion) extra a year to invest in infrastructure and opposition Labour pledging even more spending.
Money markets are now reflecting a slightly higher chance of a BOE rate cut next year, pricing it at an 80% chance up from 60%, after Michael Saunders and Jonathan Haskel opted to dissent in the first votes for cuts since 2016.
Global Stimulus
The pound was only down 0.2% to $1.2831 by 3:00 p.m. in London, staying within its range of the past few weeks. By contrast, when one policy maker unexpectedly backed a rate hike in March 2017, the pound jumped 0.7%. The reaction in bonds was also muted, with gilts paring losses but remaining weaker following a regional sell-off as trade sentiment improved. Ten-year yields were up three basis points at 0.75%.
The BOE’s shift toward a more dovish stance is still catching up with a global push by central banks for more monetary stimulus, after U.S.-China trade tensions have dented the economic outlook. That has left markets already expecting the possibility of a BOE pivot toward rate cuts, though analysts said the change Thursday had still wrong footed some traders.
“It will be more important for direction if elections are out of the way and the Brexit developments are dealt with,” said Georgette Boele, senior currency strategist at ABN Amro Bank NV. “Then the focus gets back on economic data and the BOE.”
To contact the reporters on this story: Charlotte Ryan in London at cryan147@bloomberg.net;Anooja Debnath in London at adebnath@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, Neil Chatterjee, William Shaw
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