BoE rate cut probability rises to 88 percent

The market is almost certain that a rate cut from the Bank of England (BoE) is coming in August, especially after the release of PMI reports today. In July, Flash manufacturing PMI dropped to 41-month low to 49.1. UK services PMI activity index declined lowest in more than seven years to 47.4. Flash UK composite PMI declined to 87-month low at 47.7. Going by the PMI report, it can be inferred that the UK economy is about to shrink by at least 0.4 percent.

The Bank of England (BoE) which kept rates on hold citing that there aren’t much evidence as of July meeting for the central bank to act on and indicated that a policy easing might be coming in August. Market expectations for the August rate cut from current 0.5 percent has reached highest point ever. Before the referendum announcement probability was hovering around zero percent and jumped to 50 percent post-announcement of the date. However, the market was so sure that the UK will be voting in favor of remaining inside the European Union that the rate hike probability was less than 20 percent.

We, at FxWirePro, see the central bank cutting rates by 25 basis points and increase asset purchases target from current £375 billion to £400 billion. In the absence of an increase in the asset purchase, the rate could be cut by 50 basis points. It would be considered to be a conservative approach on the bank’s part if it chooses to do anything less.

The pound has taken a hit over the PMI reports and currently trading at 1.311 against the dollar.