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The Federal Reserve held off hiking interest rates 
The Bank of England (BoE) is set to deliver its much awaited August policy decision today at 11:00 GMT and it is widely expected that the bank will talke some actions in response to UK referendum that resulted in majority of the Britons voting to opt out of the European Union.
Not much hard economic evidence is yet there to predict the impact on the British economy, however, survey-based sentiment measures show sharp deterioration. In addition to that, latest PMI report for the month of July is pointing to a sharp slowdown in all sectors of economy, manufacturing, services, and construction.
But that could be a result of deterioration in sentiment. For example real data from Society of Motor Manufacturers and Traders (SMMT) show that the new car registration rose by 0.1 percent after dropping by 0.8 percent in June. Financial markets have been holding up pretty well. Pound has taken a hit against most of its trading counterparts but fared much better than the market was expecting.
For today, the market is pricing a 25 basis points rate cut with 100 percent probability, which means a cut is already priced in. As a matter of fact the expectations are so high that it would be difficult for the central bank to surprise. In terms of policy actions, it has mixed of options -
- It may go for a just 25 basis points cut.
- It can also choose to cut and add into its £375 billion asset purchase and make it £400 billion. It would be a stronger signal.
- It can go with or without a cut but add measures to boost lending and increase liquidity by required reserve ratio cut. That would be more prudent and keep the door open for further action.
- It can go for a 50 basis points cut, with or without QE. It would be a very strong signal and will immediately start pricing a negative rate from the bank.
We expect the central bank to take a relatively conservative approach.
The pound is currently trading at 1.333 and there is a strong possibility that it would move higher.
