By Gökhan Kurtaran
London Letter – week beginning Sept. 19

One more rate cut might be on the horizon before the year ends

Last week, inflation in the U.K. rose at the stable pace of 0.6 percent per year to August versus an expected 0.7 percent. Core inflation also remained unchanged at 1.3 percent year-on-year, compared to the expected 1.4 percent. Although the latest figures did not meet market expectations, the rising import price pressure due to a weaker pound, should gradually feed into the domestic price dynamics.

In the long term, the Bank of England is aiming to achieve inflation growth of 2 percent while trying to assure markets that the bank is ready to take the necessary action despite the U.K.’s decision to leave the EU back in June.

The Bank of England Monetary Policy Committee (MPC) last week preferred to sit and watch the implication of its package brought out in August. The bank rate is already at the bottom of the range, 0.25 percent, and the Bank of England is already targeting to buy a massive £435 billion worth of sovereign bonds.

In addition, it will start purchasing corporate bonds on Sept. 27 with the aim of buying up to £10 billion worth of bonds over the next 18 months.

However, the Bank of England hinted that there could be another rate cut before the year ends. The bank said in the monetary policy summary, “If, in light of that fully updated assessment, the outlook at that time is judged to be broadly consistent with the August Inflation Report projections, a majority of members expect to support a further cut in the bank rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of this year.  The MPC currently judges that this is bound to be close to, but a little above zero.”

On the other hand, the ammunition from the Bank of England seems rather limited, as the interest rate is already at a record low at 0.25 percent. The Governor of Bank of England, Mark Carney, is known not to be fond of taking the interest rate down to negative territory from his statements in August.  

“I’m not a fan of a negative interest rate. We see the negative consequences of them through the financial system; we’ve seen that in other jurisdictions; we see the issues with savers,” Carney said.

Undoubtedly, the bank will be following the steps of the Japan’s Central Bank (BoJ) and the U.S. Fed as well.  The market assesses a 20 percent probability for the Fed to raise interest rates this week. This means that a clear majority is still not ready to absorb higher U.S. rates, yet the accompanying statement will be important as it is expected to hint at the Fed’s intentions on the future of its monetary policy.

Last week, according to a Bloomberg report, U.K. Chancellor of the Exchequer Philip Hammond said he is ready to accept that Britain may have to give up membership of the European Union’s single market — and U.K. banks’ crucial access to clients on the continent — to achieve the immigration restrictions that voters have demanded, according to two officials familiar with his thinking.

The impact of losing ‘passporting’ rights under EU law would be manageable for rated banks” which might bring relief to the banks.

“The impact of a formal withdrawal of the U.K. from the European Economic Area (EEA) -- and the subsequent loss of passporting rights granted under European Union (EU) law would likely be manageable for most U.K.-based financial firms (including branches and subsidiaries of non-EU firms), as well as for EU firms with a presence in London,” according to Moody’s report.
















19 Sep,2016