Good morning,
All change please, all change
So here we are. A new government overseen by a new PM and a new Chancellor to oversee the economy. British politics has come with a health warning in recent weeks but it is our belief that the near-term political chicanery is now at an end. There are still Cabinet posts to be announced of course, and today is only the first day of the reality TV show that Boris’s stewardship of the Foreign Office is likely to entail but the message from PM May has been loud and clear; those who voted and campaigned for Brexit are in charge of Brexit and Remainers will look after the home front.
Putting Johnson, Davis and Fox in charge of three departments that will be at the forefront of the battle for Brexit maybe eliminates some of the near-term pressure, in the UK at least, for a swift triggering of Article 50. Chancellor Hammond told reporters only a few days ago that negotiations with the EU would take at least 6 years. He has however confirmed this morning that there would be no ‘emergency budget’ here in the UK in relation to the Brexit vote. As well as digging around the Treasury for the first time today he will also be meeting Bank of England Governor Mark Carney.
High Noon for Carney and the MPC
Carney has his hands full enough without a new Chancellor to brief given the first monetary policy announcement by the Bank of England since the Brexit vote. All week we have opined that there is a decent chance that the Bank of England does not cut rates at today’s meeting and we will go into the announcement looking for a policy hold.
The Monetary Policy Committee were one of the strongest advocates of financial disruption as a result of a vote for Brexit and there is a good argument to suggest that the BOE should take action on any likely problems as soon as practicable. We have no data however and while policymakers may well look through inflation rises given a weak growth outlook, there is little incentive to rush into things.
August’s meeting provides far better infrastructure for action in that we will be given the Bank’s latest Inflation Report as well as a press conference that will allow for a full and thorough explanation of the Bank’s decision.
Market split on a cut or a hold
Opinions are fairly split on this; of the 54 economists surveyed by Bloomberg 23 think that there will be no change today with 25 expecting a cut to 0.25%. The remaining 6 are split equally between cuts to 0.10%, 0.05% and 0%. Swaps markets are pricing in an 81% chance of cut.
While a near-term hold of policy may be seen as a GBP positive it would only come with a whopping great load of dovish chatter within the minutes and policy statement and so would more than likely pressurise pound lower on the session.
Elsewhere
Elsewhere, the Reserve Bank of New Zealand has drawn some of the limelight by announcing a new economic assessment of the NZ economy next Thursday. The central bank has recently changed its calendar of meetings and this new update is set to bridge a rather long gap between meetings. That being said, central banks rarely say things if they don’t have to or have little to say; the update could easily be an outlook downgrade given recent data surprises to the low side.
Have a great day.