Bank of England warns on Brexit, holds interest rates for 85th straight month
15/Apr/2016 • Currency Updates•
Interest rates in the UK remained unchanged for the 85th straight month on Thursday, with the Bank of England once again voting to keep rates on hold.
The UK central bank sprung no surprises, with all nine MPC members again voting to keep interest rates unchanged, defying some expectations that one of the more dovish members could vote for an immediate cut. However, this offered limited support for Sterling, which finished little changed against its major peers.
In another warning on a possible Brexit, policymakers acknowledged that uncertainty surrounding the referendum could lead to a ‘softening of growth’ in the UK over the coming months, with the UK economy already suffering from a fairly pedestrian start to 2016.
The impending EU referendum, and downside risks from a slowing global economy, in our view, present a near-impossible scenario to begin tightening monetary policy in the UK.
However, we continue to believe an improving labour market and accelerating inflation could allow the Bank of England to hike rates as early as the final quarter of this year, providing the ‘in’ vote prevails at this summer’s EU referendum.
The Euro was little changed yesterday, despite the Eurozone economy tentatively emerging from deflation.
In the US, the Dollar dipped against its major peers, hurt by data that suggested consumer price growth in the world’s largest economy slowed last month.
Elsewhere, Bank of Japan Governor Haruhiko Kuroda validated our expectations for further easing in Japan, by claiming the central bank is ready to expand stimulus again if recent weakness in inflation persists.
Major currencies in detail:
Sterling strengthened a modest 0.3% against the US Dollar on Thursday, with the currency little moved following the Bank of England meeting.
The minutes remained heavily focused on the June referendum, suggesting that uncertainty leading up to the vote could have a significant effect on asset prices and, in particular, the exchange rate.
Policymakers reiterated that interest rates are likely to rise over the next three years, albeit at a gradual pace. Financial markets continue to completely discount the possibility of a rate hike this year, which we think is a serious mispricing. Only in the event of a Brexit would we expect the central bank to issue an emergency interest rate cut.
No economic announcements today means that the Pound could take a backseat, with volatility likely to be driven by external factors.
An improvement in Eurozone inflation, coupled with weak data across the Pond, allowed the Euro to end 0.25% higher against the US Dollar yesterday.
Inflation in the Eurozone economy surprised to the upside in March, with the single currency bloc emerging from deflation after last month’s figure was revised upwards to 0% from -0.1%. The core CPI measure, which strips out volatile prices, remained unchanged at 1% as expected.
Earlier in the day, IFO, one of Germany’s leading economic institutes, echoed comments from Bundesbank Head Jens Weidmann, acknowledging that the ECB’s current expansive monetary policy stance is ‘fundamentally appropriate’, given recent non-existent inflation.
Trade balance data out this morning will be the only event in a relatively light Eurozone economic calendar today.
The US Dollar was kept under pressure by some underwhelming inflation figures on Thursday afternoon, with the Dollar index falling by 0.2%.
Headline inflation in the US decelerated in the year to March, falling to 0.9% from 1% and suggesting that the Fed will likely remain cautious about increasing interest rates this year. The core measure also dipped slightly to 2.2%.
By contrast, the labour market in the US continues to go from strength to strength. Initial claims for jobless benefits plunged sharply, falling to just 253,000 from a revised 266,000, its joint lowest level since 1973. The more representative four-week moving average also fell to 265,000.
An improving labour market is one of the main reasons why we still expect the Fed to hike interest rates twice this year.
Industrial production figures this afternoon could prove a market mover in the US today when released at 14:15 UK time.
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