Good morning,
Carney confirms economic outlook has deteriorated, stimulus is forthcoming.
Just one week from the referendum vote and the Bank of England governor Mark Carney yesterday outlined the Bank’s plans to provide further stimulus to the UK economy in the coming weeks and months to counter the expected weakness in business, consumer and economic confidence in a post-Brexit world.
The Bank of England has little room for manoeuvre with interest rates – the base rate has been sitting at record lows for close to 10 years and further rate cuts will weaken what is already a slightly frail banking sector. The MPC’s other tool of choice is quantitative easing; buying bonds from the open market in order to free up funds and stimulate spending, investment and inflation. The Bank of England already holds £375 billion of assets when this program was last active in the aftermath of the financial crisis. The market now expects a further £200 billion in purchases – likely stretched out across the next two or three years to buoy market conditions and attempt to head off any deflationary pressures that could accompany an economic downturn.
Sterling slumps and interest rates dive in anticipation of BoE easing
Following Carney’s comments, the pound dropped sharply against the euro, falling to lows not seen since early 2014. Sterling’s also testing post-Brexit lows against the US dollar as Europe wakes up this morning. UK Manufacturing PMI this morning will likely be overlooked; it’s expected to show sluggish growth as businesses delayed output ahead of the referendum itself – but we’re living in a new economic climate and backward-looking economic data will likely be shrugged off.
Next week’s services PMI could be more insightful as the survey period captures the days immediately following the results – and will show the snap decisions made by those operating in the UK’s services industry.
Euro strength could be short-lived if the ECB look to defend the Eurozone
The fall in the GBP/EUR rate has effectively allowed the UK to export deflation into the Euroarea; the lower exchange rate will cause import prices in the Eurozone to fall, placing pressure on domestic prices and profit margins. The ECB signalled yesterday that they could look to adjust the rules dictating their bond-buying program in order to combat this by expanding the pool of assets from which they conduct their purchases. If enacted, this could send market interest rates lower in Europe, and take some of the steam out of the euro’s rally against the pound.
Have a great weekend.