Rate cut expected

Back to normal

After what must be one of the briefest honeymoons ever investors turned their backs on sterling as Britain's new prime minister named her first handful of cabinet appointments. There is no indication that the two events are connected.

The pound's downward drift was already in progress as London opened on Wednesday morning. It continued for the rest of the day before coming to a halt at midnight. The only UK ecostat that could possibly have effected sterling was the Royal Institution of Chartered Surveyors' housing price balance, which came out just as the pound began its recovery. It clearly had no effect whatsoever on sterling because at +16 it was the weakest reading since the beginning of last year. The RICS blamed the "marked drop" in housing market activity on the uncertainty surrounding the EU referendum.

It looked as though sterling's reversal was in anticipation of today's announcement by the Bank of England's Monetary Policy Committee. Market pricing indicates an 80% chance that the MPC will halve the Bank Rate while a poll of economists found 56% of them predicting a cut. The pound found itself once more at the back of the field, sharing the wooden spoon with the NZ dollar. The two were down by an average of -0.9% against the other dozen most actively-traded currencies.

Forward glance

The NZ dollar's misfortune was a briefing by the Reserve Bank of New Zealand that it will issue an economic update next Thursday, three weeks ahead of the scheduled policy meeting on 11 August. Investors smelled a rat.

Putting two and two together to make five they decided the only possible reason for the extraordinary update could be to warn of a forthcoming rate cut. They knocked two cents off the Kiwi dollar and it continued lower.

The Aussie dollar suffered collateral damage from the RBNZ's pre-announcement announcement but still retained a cent and a half advantage over sterling because of the Australian jobs data released earlier. They showed a big swing from part-time to full-time employment and an uptick in the participation rate from 64.8% to 64.9%.


At midday the Bank of England will reveal the decision of the MPC and publish the minutes of the meeting at which it was made. The balance of opinion has it that the Bank of England's benchmark rate will be cut from 0.5% to 0.25%. There could be other anti-recession measures too.

With such a strong majority anticipating a rate cut it would normally be reasonable to expect that sterling would rally should one fail to appear. However a statement this morning by Philip Hammond, Britain's new finance minister, might have whisked away some of that potential upside. 

Just ahead of London's opening Mr Hammond said that Britain will not remain in the single European market after it leaves the EU. Whilst not a complete surprise, his statement was a bit brutal and must inevitably increase the uncertainty about the country's future.