Closed Bank of England warns of Brexit uncertainty but holds rates steady — as it happened

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Follow along as FT journalists cover Thursday’s BoE meeting and its financial fallout.

Pound breaches $1.21 ahead of BoE

The pound has fallen below $1.21 for the first time since January 2017 ahead of the Bank of England’s interest rate decision later on Thursday.

Sterling fell 0.3 per cent against the dollar to $1.2093, weighed down by greenback strength in the aftermath of the Federal Reserve’s meeting and lingering investor concerns that Boris Johnson’s new government could be leading Britain into an autumn no-deal Brexit.

Sterling was 0.2 per cent lower against the euro at €1.0957.

The pound fell 4.2 per cent against the dollar in July as investor worries over the likelihood of a disruptive exit from the EU hardened.

The currency’s sharp fall is likely to push consumer prices higher, presenting a fresh headache for BoE policymakers, who are widely expected to keep interest rates on hold later today.

The Monetary Policy Committee is already grappling with how to handle the rising risk of a no-deal Brexit. Its forecasts currently assume a smooth exit from the EU.

More pain ahead?

Things could get much, much worse for the pound, and the Bank.

Despite sterling’s recent tumble, many investors and traders have not fully priced in a no-deal exit.

“It is now the base-case scenario for me,” said Neil Jones, head of FX sales for financial institutions at Mizuho Bank. Mr Jones said in such circumstances the pound will likely trade at sustained levels around the $1.10 to $1.15 levels it briefly touched during a 2016 ‘flash crash.’

Analysts at US bank JPMorgan see a 25 per cent chance of no deal.

Our analysts expect cable at $1.15 in a no deal case. They consider that to be a conservative scenario and point out that cable could just as easily be another 10% lower.

The Bank’s Brexit bind

Heading into today’s meeting, the Bank of England has been guiding markets to expect “gradual” interest rate hikes. Investors disagree, pricing in a better-than-even chance of a rate cut by the end of the year. That’s largely because the Bank’s forecasts assume a smooth Brexit, while markets have spent the past couple of weeks ramping up bets on a no-deal outcome – dumping the pound on the assumption that the ensuing chaos will lead to rate cuts as the economy tanks.

No one expects a rate cut today, but BOE-watchers are hungry for some Brexit clarity from Mark Carney. That could mean laying out two separate scenarios: one for a smooth Brexit (which would presumably continue to include a hiking bias) and another for no deal. To shift the markets, he would probably have to spell out what no deal would mean for rates, and how likely he thinks no deal is.

It’s not all about Brexit

There are other reasons investors are betting on a dovish turn from the Bank. Firstly, economic data have been weakening – this morning’s manufacturing PMI for July showed the sharpest fall in output in seven years. Then there’s a bigger global shift in rates. The US Fed cut yesterday for the first time in a decade, while the ECB is heading for a big easing package in September. The BOE is looking increasingly out of step, and markets clearly think that’s unsustainable. 10-year UK government bond yields fell below 0.6% this morning, the lowest in history except for a brief dip in August 2016.

BoE holds rates
The Bank of England has held its key interest rate steady at 0.75 per cent as had been widely-expected. The Monetary Policy Committee was unanimous in its decision.

BoE cuts growth forecasts

Brexit uncertainty and global trade tensions are hitting UK growth, with the Bank of England’s latest forecasts showing a one-in-three chance that the economy will be shrinking by the start of next year, the FT’s Delphine Strauss writes.

In its August inflation report, the central bank cut its central forecast for growth this year and next, predicting output would expand just 1.3 per cent in both 2019 and 2020 even if it were to cut interest rates as markets have been expecting.

It said there was a 33 per cent probability of negative growth in the first quarter of 2020 if interest rates remained unchanged – the highest chance of a contraction it has seen since the immediate aftermath of the Brexit referendum in August 2016.

Even after taking account of the volatility caused by Brexit-related stockpiling and factory shutdowns, “underlying growth appears to have slowed since 2018 to a rate below potential,” the monetary policy committee judged, noting that weaker global growth and entrenched uncertainty over the Brexit process were weighing on companies’ spending.

“What does a central bank do when the currency is in freefall?”

That’s the question asked by GAM investment director Charles Hepworth. He goes on:

Today’s decision by the BoE to do nothing on rates again is further acknowledgment of their inability to stabilise the political-inspired mess we see ourselves in. Hiking rates in the face of a slowing domestic environment is not an option, and rate cuts at this stage would lead to further falls in the currency. There is one further policy meeting ahead of the Brexit Halloween deadline, yet expectations for any move are still non-existent. Boris Johnson and his team might try to champion a new sense of optimism for Brexit, but he and his government team are the only ones that can inject any strength into sterling, and that outcome looks very difficult to see right now.

Sterling edges back above $1.21

The pound has largely shrugged off the entirely-expected decision to hold rates, and the pared-down growth forecasts from the Bank. It is now just above $1.21 after staging a minor rally into the BoE’s midday publication.

“Inconsistencies” in the Bank’s forecast

The Bank continues to assume a smooth Brexit in its forecasts. Those forecasts, however, take into account market prices which are based on very different assumptions (namely that no-deal Brexit is a significant and growing possibility). The inflation report acknowledges this, saying “given the MPC’s conditioning assumptions, there are some inconsistencies in the forecast”. So take the current projections with a pinch of salt, because they’re based on a path for markets which almost certainly won’t actually come to pass.

Brexit, Brexit, Brexit

The FT’s George Hammond has crunched the numbers and found mentions of Brexit in the August inflation report have jumped since the previous one in May.

“Brexit” was mentioned 133 times, up from 87 in May.
“No-deal Brexit” garnered 28 mentions, up from 5 in May.

BoE warns of further sterling weakness in case of no-deal Brexit

It may seem an obvious point, the FT’s Katie Martin writes, but it appears to bear repeating: the Bank thinks that if the UK crashes out of the EU without a deal, it would hurt.

In its minutes, the BoE says:

“In the event of a no-deal Brexit, the sterling exchange rate would probably fall, CPI inflation rise and GDP growth slow.”

Some market participants think at those levels, a no-deal Brexit is at least in part priced in.

But if that assessment is right, the already bruised pound, which has had a tough few days, still has further to fall. It trades just above $1.21 now after a whack delivered by a jump in the dollar overnight.

Choppy day for sterling

It’s been a bumpy day for sterling. Here is a look:

‘Most risks’ to cross-border financial services mitigated

Most risks relating to the disruption of cross-border financial services in the event of a no-deal Brexit had been mitigated, said the Bank, the FT’s George Hammond writes.

A number remained, however. Among them, said the Bank, was the issue that “most of the 240,000 UK businesses that currently trade solely with the EU” lacked the required certification to prepare them for EU border inspections, which may prevent them from selling their products in the EU.

Carney warns on no-deal volatility

In his press conference, BoE governor Mark Carney warned on the likely effects of a disruptive exit from the EU, with no transition period or exit deal:

“Sterling would likely fall, the risk premiums on UK assets would rise and volatility would spike higher.”

Mr Carney said in the event of a deal, then interest rates would likely gradually rise and sterling appreciate.

UK business investment has fallen ‘a lot’

The Bank has highlighted how business investment has weakened considerably amid rising uncertainty over a no-deal Brexit.

“Investment by UK businesses has weakened a lot. We think this is partly because of uncertainty about Brexit,” the Bank said on its Twitter page.

Private surveys, including one released earlier on Thursday, have highlighted how concerns over Brexit have weighed heavily on the sentiment of British business executives.

What chance no-deal?

Mr Carney did not answer a question on what his own view of the likelihood of a no-deal exit is, but he said the Bank has been preparing for the possibility of a disruptive exit from since the day after the referendum. “The financial sector is prepared for that contingency,” he said.

He added that markets have recently put a greater, if not majority, weight on the probability of no-deal.

Under no deal, what happens to rates?

Leaving without a deal is “very unusual for an economic shock” because it would be an instantaneous shock to both demand and supply, Mark Carney says. He’s reiterating the Bank’s line that no deal does not mechanically mean cuts – rates could also rise. Markets didn’t buy this message when Carney first articulated it last year, and there’s no sign they’re buying it now. As far as investors are concerned, no deal means more stimulus.

Punters see rising likelihood of chaotic Brexit

The Bank has cobbled together a graphic that plots sterling against the odds of no-deal Brexit as implied by action in the betting markets. It isn’t pretty.

‘Massive’ monetary stimulus?

Asked whether the Bank can be relied upon by Downing Street to unleash “massive” monetary stimulus in the event of a no-deal, Mr Carney said: “It depends.”

The governor said factors including the degree of the country’s preparedness, the nature of the exit and supply capacity of the economy would influence the decision.

He added:

“We will do what we can to support jobs and activity, but there are limits.”

Digging into the inflation report

The effects of the trade war between the US and China were being felt more acutely than when the bank last reported in May, the FT’s George Hammond writes.

As well as weighing on bilateral trade between the countries, the tensions have diminished global business confidence and dragged on GDP growth, the BoE said.

The impact on the UK’s GDP growth was a 0.1 per cent reduction, said the bank, which added that “a severe shock could lead to a much larger impact”.

Damage to investment may already be done

Businesses surveyed by the Bank of England are uncertain that a Brexit deal will boost investment, highlighting how even if the UK break with the EU is amicable, the economic effects may stretch on for some time.

ING analysts, who flagged the chart above, note:

All of the above shouldn’t come as too much as a surprise to markets – the challenge for the Bank today was always going to be marrying together the more hawkish forecasts, and the more cautious short-term outlook, without stepping into the political arena.

What is a little more surprising is the extent to which the Bank has cut back its business investment forecast for 2020. Having previously expected capital spending to grow by 3% next year, it now expects it to fall by 1.5% – a pretty substantial change. The follows a new survey of businesses by Bank Agents, which found that even in the case of a deal being struck, on balance firms did not expect to increase investment.

To us, this suggests that interest rates are likely to remain on hold for the foreseeable future. While the Bank’s forward guidance notionally points to further tightening, we think the mounting uncertainty related to Brexit – even in the case Article 50 is extended further, or where a deal is agreed – means this is unlikely to materialise.

Carney disagrees with former Trump adviser Cohn over no-deal

Mr Carney had a blunt and brief response when asked if he agreed with former Goldman banker and Donald Trump adviser Gary Cohn that a no-deal exit would be preferable to further endless delays.

“No. He is wrong.”

Mr Carney added:

“No deal as a crystallisation of a bad economic outcome is not preferable to the possibility of a better economic outcome.”

‘Surprising’ decision not to cut

That’s according to Fidelity International portfolio manager Sajiv Vaid:

“The Bank of England continued to buck the global trend that we have seen so far this year of the other major central banks’ ‘pivot’, voting 9-0 to keep rates unchanged. We find this surprising given the growing uncertainties both domestically and globally with regards to growth and inflation.”

Fidelity’s base case is for a 25 basis points cut by the end of the year, “reflecting the need for an ‘insurance cut’ regardless of Brexit.”