BoE wrong to act so soon – CMC Markets

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The Bank of England's (BoE) decision to cut interest rates and expand quantitative easing (QE) at its August meeting was the wrong monetary policy response to Brexit, says Michael Hewson, chief market analyst at CMC Markets, which topped last week's one-month currency forecast table.

In Hewson's view, there was little economic data to warrant easing; the worst of the fallout is probably yet to come as Article 50 has not been triggered and the government has not come forward with an emergency budget.

"I thought it was a mistake for the BoE to cut rates in the first place, because I didn't think the UK data warranted it. If the British government didn't feel [it] necessary to introduce an emergency budget, then it makes no sense to implement even more emergency monetary policy measures," says Hewson.

Sometimes it's about looking through the hyperbole and asking yourself how much is already priced in
Michael Hewson, CMC Markets

"Sometimes it's about looking through the hyperbole and asking yourself how much is already priced in. The BoE wants sterling to be weaker and inflation to be higher, and they've already got both. Cable was already lower at $1.30 at the beginning of the month and is still around that level, despite the fact they cut rates and did QE. Why did they feel they needed to do it at all?" he asks.

One reason may be the overall sentiment. Consumer confidence in the UK saw its biggest drop in 26 years in the month after Brexit, but despite the gloomy prospects for retail sales in July, data showed a 1.4% rise in spending.

As a result, Hewson expects a stabilisation period for the pound, which he sees moving up towards $1.35 over the course of the coming month and then trading within the $1.30–$1.35 range.

Cue the Fed

But much of that prediction hinges on the next move from the Federal Reserve. Some expect the central bank to move ahead with its rate-normalisation policy in September, although Hewson believes a hike in December or even next year is more likely.

"The Fed may well wait until December. They are getting near inflation and employment targets without hiking, so there's no point in doing it now," he says.

"September is also very close to the US elections and, with GDP slowing down, it could be ill advised to act sooner rather than later. Also, you have the European Central Bank, the Bank of Japan and potentially the BoE all talking about further rate reductions, which puts the Fed in a very difficult position," he adds.