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August 4, 2016

Pound holds near close ahead of BoE, UK Gilts yield drop

Pound holds near close ahead of BoE, UK Gilts yield drop

After holding off interest rate cut in July, the Bank of England is expected to venture out for monetary easing today, first time in 7 years in response to recession risks sparked after Britain’s vote to quit EU. The country’s interest rate which currently stays at 50 b.p. can be lowered to historical low of 25 b.p., predicts majority of market experts.

The futures on BoE rate decision, which serve as a main indicator of market sentiments towards the event price in almost 100% probability of the rate cut.

Projected interest rate at 0.25% will become the lowest since foundation of BoE in 1694. The financial institution will also release revised GDP and CPI forecasts which is expected to contain no recession warnings, according to Bank of America analysts. However the figures will be probably revised towards the slump, analysts say.

The confidence in stability of UK economy was eroded after manufacturing and service PMI reports showed activity in the sectors fell to the lowest level for several years. Being a main gauge of economic potential of the country, grim PMIs forced BoE to mull seriously over easing as some risks threatening the country began to “crystallize” according to the last BoE financial stability report. Service PMI in July contracted to 47.4 points from 52.3 points in June, renewing lows of 2009 year.

Meanwhile, inflation in country which were endeavored to bring to target of 2% in 2013, may accelerate to 3% by the end of 2017, mainly due to the depreciation of the pound. According to the experts of the National Institute of Economic and Social Research UK, the UK economy is likely to grow by 1.7% in 2016, and only 1% – in 2017. Nevertheless, the Central bank provides more soothing projections – inflation in the country will climb above target level of 2% in 2018, and will reach 2.2% in 2019. In June, consumer prices rose only 0.5%.

Pound hovers near close at 1.3330 ahead of BoE, investors buy UK Gilts which yield fell by -0.06%. German bonds yield also fell by 32.35% to -0.045. Gold fell half of percent on expectations of monetary easing.

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