Traders Speculate the BOE May Follow Fed With Emergency Cut
Traders Speculate the BOE May Follow Fed With an Emergency Cut
(Bloomberg) --
Market speculation is mounting that the Bank of England will follow the Federal Reserve with an emergency interest-rate cut.
Investors are pricing in a 45% chance that officials will lower borrowing costs by 50 basis points this month, with some market watchers, including HSBC and Nomura, saying there could be an emergency move before the March 26 meeting. The probability had been as high as 60% before incoming Governor Andrew Bailey said more evidence was needed to decide the next move.
Investors have been more aggressive with their expectations for monetary easing after the Fed surprised traders with its first out-of-meeting cut in more than a decade. Still, the relief was short-lived for tanking equity markets, meaning central banks may decide that other, more targeted tools may be better to combat the effects of the coronavirus.
What Our Economists Say:
“Spillovers from China’s virus-led slowdown will weigh on the economy and a domestic coronavirus outbreak threatens a sharp shock to growth. As a result, we have lowered our near-term forecast and now expect the Bank of England to cut interest rates at its next meeting, or before if the outbreak escalates.”
-- Dan Hanson. For the full U.K. INSIGHT, click here
Governor Mark Carney, who leaves the BOE this month, said on Tuesday that “there’ll be some differences in the exact form and timing” of global measures, but they will be “both powerful and timely.” The Bank of Canada cut rates more than expected with a 50-basis-point move at its scheduled meeting on Wednesday, and said it could act again if necessary.
Bailey, who takes the helm of the BOE on March 16, earlier said collective action may be needed to offset the impact that the outbreak is having on supply chains.
That prospect of easier policy sent the yield on 10-year U.K. government bonds on Wednesday to 0.335%, an all-time low. Before the Fed’s action on Tuesday, money markets were pricing in a 25-basis-point cut for the BOE in March.
An emergency rate cut this week would allow the BOE “time to formulate a plan for more targeted easing at the end of the month,” said George Buckley, chief economist at Nomura.
He expects another 25 basis points of easing at the bank’s scheduled meeting in early May, taking down rates to 0.25%.
The BOE could also pull on other levers. JPMorgan Chase & Co. economist Allan Monks said officials could take steps to help keep cash flowing through the economy. These could include canceling a planned increase in the capital banks must hold and tweaking its lending program for them.
What Bloomberg Intelligence Says
“March will be the month of policy makers panicking and U.K. money markets are already cumulatively pricing more rate cuts ahead than compared to last autumn’s Brexit deadline. The virus outcome is unknown so any attempt to fade or go with the moves may be best expressed through options.”
-- Tanvir Sandhu, Chief Global Derivatives Strategist
To contact the reporters on this story: James Hirai in London at jhirai3@bloomberg.net;David Goodman in London at dgoodman28@bloomberg.net
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Neil Chatterjee, William Shaw
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