BoE Policymaker Saunders says, "Rate Cuts are Likely"

The pound is under pressure this morning following comments from Bank of England policymaker, Michael Saunders. In a statement today in Barnsley, he has suggested that – even if the UK avoids a no deal Brexit - that there is every likelihood that the next rate move could be down rather than up.

The Bank of England has already commented that they believed that uncertainty caused by Brexit and also an overall slower global economy had dragged on the economy of the UK but, until now, stopped short of discussing any rate cuts.

Michael Saunders has spoken of the rate cut even if a deal is achieved in Brussels, highlighting that the uncertainty that has been experienced to date means that the damage would have been done and the monetary policy required to prop up the strength of the economy would likely be expansionary.

Markets have reacted by selling sterling which at the time of writing has lost on average around half a percent across the board.

Markets until now have been quieter in the last few weeks when compared to the strength of volatility in the preceding few weeks – which is saying something, given we certainly are still seeing day on day moves.

Interestingly, Barclays have discussed their base line forecast position for the 31st October and beyond is that they (narrowly) forecast a no deal Brexit. The high street bank discussed the impacts of this, saying that they believe the UK could fall into a shallow recession even if it were propped up through monetary policy.

A no deal Brexit executed in the first quarter of 2020 would lead to “significant dislocations of both sides of the English Channel”. However, it should be noted that they forecast this perhaps may be short lived given that there are significant aspects of the British economy that remain very attractive and would still find investment and pound buyers for the long term.

Politically there has been considerable unrest in the States, with Donald Trump facing allegations from an unknown source that he attempted to arrest the course of democracy by manipulating voting/polling – though this appears to have been a bit exaggerated.

However economically there exists some investor sentiment that could see the USD to appreciate in the near term due to the stance of the Federal Reserve toward their interest rates and Bond yields attracting investors to the Dollar.

Westpac sees the risk of impeachment as being an ‘overstated risk’ and because it is increasingly appearing less likely that further rate cuts are to come. This would provide a relatively safer yield environment for investors, something in proportionately short supply at the moment and buyers would add scarcity to the USD via heightened buying – leading overall to the currency heading higher in value.

Rates at the time of writing:

GBPEUR – 1.1244

GBPUSD – 1.2270

EURUSD – 1.0917

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