BoE rate cut too risky given the fragile pound – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the pound experienced another volatile trading session yesterday when cable fell sharply from an intra-day high of close to 1.2240 to an intra-day low of close to 1.2080.

Key Quotes

“It threatened to bring an end to the brief period of stability for the pound as it has been recovering some composure following the flash crash. There was no obvious fundamental trigger for the renewed although some have tried to attribute it to comments yesterday from UK Chancellor Hammond in which provided reassurance that the government is not looking to undermine the BoE’s independence which continues to leave the option of whether to implement further QE up to the BoE. More likely broad based US dollar strength contributed to the selloff in cable.

The sharp sell-off for the pound highlighted again that the pound remains fragile in the near-term. In these circumstances, we continue to believe that the BoE should tread carefully when considering whether to lower rates further before year end as previously signalled. Another BoE rate cut could exacerbate pound weakness and volatility in the near-term further complicating the UK economic outlook. BoE Governor Carney spoke yesterday on the pound stating that there are limits to the bank’s willingness to overshoot the inflation target, and officials were not indifferent to the exchange rate.

The pound’s moves in recent week were described as substantial. On balance, we believe that his comments suggest that the BoE will refrain from lowering rates further at next week’s policy meeting although it is unlikely to offer much support for the pound.”