BoE Cuts Growth Outlook, Sterling (GBP) Unmoved

Talking Points:

• BoE leaves rates unchanged as the increasing likelihood of a no-deal has led to a marked depreciation of the sterling exchange rate

• GDP in Q2 expected to be flat as underlying growth slows, growth projections revised downward

• GBPUSD remained mostly unchanged as MPC minutes provide no guidance into the future of the economy

********** UPDATE ************

Below are some of the headlines from Mark Carney's press conference:

• Monetary response to Brexit will not be automatic but the BoE will always try to keep in line with the 2% inflation target

• A no-deal scenario would not only bring a shock for the economy in terms of disruption to demand, but supply capacity will also suffer, despite no-deal preparations, making policy reponse difficult to predict

• Already there are signs of trade wars causing more disruption than expected, with global manufacturing PMI at its lowest level since October 2012

• UK growth forecasts are more volatile as a result of Brexit uncertainty as hopes of researching a withdrawal agreement are diminishing, which has led to a weakness in business sentiment and investment

• The labour market has remained resilient but GDP growth is expected to slow as consumer spending will remain on the prudent side

• UK economy could follow a wide range of paths, which will be mostly dependent on the outcome of Brexit. BoE is expecting sterling to fall and risk premiums to spike higher if a no-deal Brexit takes place, and businesses expect their output and earnings to fall between 1% to 3% in such event

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The Bank of Englands Monetary Policy Committee (MPC) has decided to leave rates unchanged at 0.75% in its August meeting as Brexit and global growth uncertainties continue to loom. They also voted to keep bond and asset purchase targets unchanged at 10b and 435b respectively.

The decision saw a small spike in GBPUSD as recent dollar strength coupled with increasing Brexit uncertainty has kept the pair trading near two-year lows. But the pair remained mostly unchanged as the meeting minutes failed to provide any further guidance into the next coming months, keeping Q2 growth expectations flat at 0% and a revision downward for the subsequent quarters.

Up until now MPC projections have been based on a smooth Brexit taking place, where gradual hikes would be needed in the months after the withdrawal is completed. Their stance has remained mostly unchanged as they stated that rate hikes would be appropriate, but they did add that they will need to see a recovery in global growth before interest rates are adjusted.

BoE Governor Carney is due to give a press conference at 1130 GMT.

GBP Q3 Forecast

UK inflation started to fall in August 2018 from year highs of 2.7%, led mainly by a drop in fuel and clothing prices. The steady fall in prices pushed back the need for the Bank of England to hike rates in early 2019, as global economies were experiencing slowing growth and other Central Banks embarked on a cycle of monetary easing. But the need to cut rates in the UK may be pushed back as a weakening pound will likely lead to a push higher in inflation, as imports become more expensive and the demand for domestic exports increases. This will leave the BoE with the difficult task of balancing Brexit and economic uncertainty with a potential increase in inflation as a result of a weakening pound.

GBP Forecast Trading Guide

Yields on UK gilts have continued to fall reaching their lowest level since August 2016. Current gilts offer a return of just 0.62%, down from 1.38% a year ago. The fall in yields coupled with increasing odds that a rate cut will happen before the end of the year continue to put downward pressure on sterling as pessimist sentiment in the future of the British economy takes over.

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