BOE monetary policy preview

The pound has declined sharply over the past weeks as no political parties gained an outright majority in the June snap election. Conservatives, who had a majority government is now operating as a minority government. This just adds to the current political uncertainty surrounding Brexit and at a time when inflation is higher than any other major developed countries.  Amid these uncertainties, BoE is scheduled to announce interest rate decision at 11:00 GMT.

• Monetary policy is one of the two major directional and volatility risk for the pound the other being Brexit.

BOE policy and expectation –

• After the referendum last year, the Bank of England (BoE) has reduced rates by 25 basis points, introduced additional asset purchases of £60 billion, introduced £10 billion worth of corporate securities purchase, and £100 billion worth of targeted lending scheme, all to be funded via balance sheet expansion.

• With the UK economy performing much better than expected, the Bank of England (BoE) Governor Mark Carney is likely to keep the ammunition dry for future firing. In addition to that, the central bank has indicated that the next move in monetary policy could be on the either side of the spectrum given the recent sharp rise in domestic inflation. The inflation is currently at 2.9 percent.

Impact –

• As of now, the interest rate hike by the US Federal Reserve last night is rattling the market, so without any further action, or strong words with further policy hints, BoE’s announcement unlikely to make much of an impact.
• Moreover, the focus for the pound is on the upcoming Brexit negotiations as well as on the uncertainties surrounding the current operating structure of the government, so, without any major change, it is likely to turn out as a non-event.

The pound is currently trading at 1.27 against the dollar.