GBP: Downward pressure likely to continue - BNZ

Jason Wong, Currency Strategist at BNZ, suggests that the market’s playbook in the post-Brexit world has been to buy equities, bonds and risk currencies as central banks would deliver more easing, creating a lower-for-longer interest rate environment.

Key Quotes

“That stance was vindicated overnight with the Bank of England delivering a ‘muscular’ easing in policy spanning a 25bps rate cut, a £50bn expansion of the existing asset purchase programme, £10bn of corporate bond purchases and a term funding scheme introduced that will provide funding for banks at interest rates close to Bank Rate.

We don’t see slightly lower interest rates sparking a revival in the economy – the uncertain outlook means that it’s simply not the environment for businesses to be investing. Thus downward pressure on GBP is likely to continue.

It was all about the Bank of England overnight, with the Bank over-delivering on expectations for further policy easing. The Bank was willing to look through a temporary increase in inflation to an above-target level, driven by the weaker GBP, and ease policy regardless.

In addition to the series of policy measures delivered, the committee signalled that more easing could be on its way soon, even on current forecasts. “If the incoming data proved broadly consistent with the August Inflation Report forecast, a majority of members expected to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.” Governor Carney made his disdain for negative interest rate clear and the BoE will not be going down that track. The MPC currently judges the lower bound to be “…close to, but a little above, zero”.”