I woke up this morning quite excited. Today was the big day! The day we would find out whats going to happen to interest rates. I even had it in my outlook calendar (yes, perhaps only an economics geek would get this excited.) But this was no ordinary MPC meeting-you know, the type where nothing ever actually changes.
The markets waited with baited breath. Would it be .25? 0? Or even a rather trendy negative? Hey, if its good enough for the Japanese…
There have been a few voices calling for such insanity, but most, including me, expected a cut to 0.25%. Given the eagerness to intervene in recent weeks- by reducing the counter cyclical buffer so that banks can lend out more money- and the hints of a rate cut and QE, combined with the less than positive emerging data on consumer and business confidence, it seemed a fair bet.
So I was surprised and pleased to see that they had decided by a vote of 8-1 to…wait for it….
‘maintain Bank Rate at 0.5%‘
Business as usual then-but not for long.
The Pound jumped up against the dollar-in fact there was a gap of as it launched itself from $1.3235 to the relatively heady heights of $1.3463.
But the FTSE 100 and 250 looked none too pleased, falling 1.23% 0.8% respectively. I guess the FTSE100 fared worse because many of the companies earn money overseas so the and so a weaker pound means they get more of them when their foreign earnings are converted.
Brexit certainly hasn’t been short of surprises and today was no exception.
Markets were ‘disappointed’ and Governor Mark Carney was accused of dithering and changing his tune. Well, it wouldn’t be the first time. I cant help wondering if maybe he hinted at rate cuts to see how the markets might react to a real rate cut. Or perhaps he was just buying some time until the economic situation became clearer.
Now if I was a market I might possibly take this as a good sign that at least for now most of them aren’t convinced that things are really bad enough yet to justify a cut.
Yet.
So why was I pleased? Well it looks like monetary policy actions are a bit like buses. Not much happens for a while and then suddenly three come along all at once.
The bank has a careful balancing act between acting too soon and possibly running out of ammunition before anything (much) has really happened (more on this in a later post), and waiting until its bad enough to act upon. But by then people have been hurt. Jobs have been lost, houses repossessed.
The main reason for todays inaction is that they feel that they simply don’t have enough data to make an informed decision. So however disappointed the markets might be, it is a sensible one. Don’t try to rescue something until youre sure it needs rescuing.
It probably wont last though. The Bank will know way more in August when they publish their latest GDP forecast and the MPC have hinted strongly that a rate cut is likely to happen then.
But hey, if they are in doubt about how bad it could get, they could always consult the Bank of England’s Q2 inflation report-you know, that report! The one that scared everyone.
What now??! 