Sterling feeds on peculiarly high BoE 'terminal rate': Mike Dolan
By Mike Dolan
LONDON, Sept 20 (Reuters) -Tight monetary policy coupled with a penny-pinching fiscal agenda usually results in currency appreciation, and sterling is surging on the prospect. But it's far from clear why the UK government or the Bank of England want a rising pound right now.
This week's BoE decision to hold off on its second interest rate cut of the year was billed by many central bank watchers as an expected "non-event".
But the freeze is more meaningful - and even a little head-scratching - given what the BoE's G7 peers are doing - not least the Federal Reserve's outsize half point rate cut the previous day and the European Central Bank's second rate cut of 2024 last week.
Keeping the UK policy rate at 5% may simply be a matter of messaging, as the BoE seemed to suggest.
It could be a signal to wage bargainers that they need to curtail their expectations and a call for service sector firms to tamp down on still-high price rises. Or it may just be reasonable hesitation, as the BoE is waiting for the concrete data it'll get in the new Labour government's first budget, set to be released next month.
But with the BoE's repeated stress on stamping out inflation "persistence", it took a distinctly more hawkish tone than other big central banks have recently - so much so that markets now think the chance of a BoE cut in November is below 70%, compared to a sure thing before the meeting.
And where markets see the UK's easing cycle ending up is just as harsh.
The implied "terminal rate" is currently around 3.4%, which the central bankis expected to reach by the end of next year. That is almost 50 basis points higher than the Fed's equivalent rate, 150 bps above the ECB's and Bank of Canada's and 300 bps over the Bank of Japan's.
These policy rate premiums are all higher than they were in the decade before 2022's worldwide scramble to tighten.
It's not entirely clear what justifies this. Are today's underlying UK inflation pressures really that much worse that those in other major economies? Has the UK's historical vulnerability to inflation resurfaced? Or has Brexit thrown a spanner in the works in the interim?
The market's longer-term rate horizon also seem puzzling when considering other details of the central bank's outlook.
In its meeting statement, the BoE downgraded its GDP growth forecasts for the current quarter, said services inflation would ease further by year-end,and noted that surveys show public inflation expectations are falling back to pre-pandemic levels as headline inflation skirts its target 2%.
The economic drag should be bigger if the upcoming government budget is true to early indications and tightens fiscal policy with a mix of tax rises and spending cuts needed to fill a much-touted 20 billion pound ($26.55 billion)hole in public finances.
STERLING STARRING
Sterling seems to love it. The promise of relatively tight monetary and fiscal policy has pushed the pound GBP= to its highest level against the dollar in more than two years. And it's a whisker from its two-year highs against the euro.
Sterling's trade-weighted index GBPTWI=BOEL is up more than 3% this year alone, and is a stone's throw from its highest point since the Brexit referendum in 2016.
Given that trade-related Brexit problems are at least part of the UK's growth problem, a surging pound can hardly be all that helpful right now.
Even if a strong pound puts downward pressure on imported energy or commodity inflation, that hardly helps the BoE. Its stated concern is domestic services and wages, which are largely unrelated to the exchange rate.
The BoE did note that the pound's effective exchange rate had appreciated more than 1% since its previous meeting, though it blamed the U.S. rate shifts and related dollar move for most of that.
'IDIOSYNCRATIC'
If it's all simply a question of timing, then the BoE will have to accelerate its easing eventually and some economists think it will.
"If the government is more stringent on fiscal policy, we think the Bank will be forced to increase the pace of the cutting cycle to offset the hit on both households' and businesses' finances," said AXA Investment Managers economist Gabriella Dickens, adding there was an outside chance of two cuts by year-end.
And the central bank may find itself with some considerable catching up to do.
Jefferies economist Modupe Adegbembo said while there may be "idiosyncratic" reasons for UK inflation persistence, pressure on the BoE to deliver two more cuts this year will rise meaningfully if the Fed were to ease by yet another 50 bps at its next meeting.
So the pound may have good reason to be where it is right now - but this strength could evaporate quickly if it's relying solely on such a high BoE landing zone.
The opinions expressed here are those of the author, a columnist for Reuters
($1 = 0.7534 pounds)
BoE's implied 'terminal rate' versus peers https://tmsnrt.rs/3MSgfgv
Fed cuts, BoE and Norges Bank hold https://reut.rs/3zBcEAe
Sterling feeds off BoE hesitation https://tmsnrt.rs/4euUwH7
UK public inflation expectations back at pre-pandemic levels https://tmsnrt.rs/3Zqer5T
By Mike Dolan; Editing by Jamie Freed
متعلقہ اثاثے
تازہ ترين خبريں
دستبرداری: XM Group کے ادارے ہماری آن لائن تجارت کی سہولت تک صرف عملدرآمد کی خدمت اور رسائی مہیا کرتے ہیں، کسی شخص کو ویب سائٹ پر یا اس کے ذریعے دستیاب کانٹینٹ کو دیکھنے اور/یا استعمال کرنے کی اجازت دیتا ہے، اس پر تبدیل یا توسیع کا ارادہ نہیں ہے ، اور نہ ہی یہ تبدیل ہوتا ہے یا اس پر وسعت کریں۔ اس طرح کی رسائی اور استعمال ہمیشہ مشروط ہوتا ہے: (i) شرائط و ضوابط؛ (ii) خطرہ انتباہات؛ اور (iii) مکمل دستبرداری۔ لہذا اس طرح کے مواد کو عام معلومات سے زیادہ کے طور پر فراہم کیا جاتا ہے۔ خاص طور پر، براہ کرم آگاہ رہیں کہ ہماری آن لائن تجارت کی سہولت کے مندرجات نہ تو کوئی درخواست ہے، اور نہ ہی فنانشل مارکیٹ میں کوئی لین دین داخل کرنے کی پیش کش ہے۔ کسی بھی فنانشل مارکیٹ میں تجارت میں آپ کے سرمائے کے لئے ایک خاص سطح کا خطرہ ہوتا ہے۔
ہماری آن لائن تجارتی سہولت پر شائع ہونے والے تمام مٹیریل کا مقصد صرف تعلیمی/معلوماتی مقاصد کے لئے ہے، اور اس میں شامل نہیں ہے — اور نہ ہی اسے فنانشل، سرمایہ کاری ٹیکس یا تجارتی مشورے اور سفارشات؛ یا ہماری تجارتی قیمتوں کا ریکارڈ؛ یا کسی بھی فنانشل انسٹرومنٹ میں لین دین کی پیشکش؛ یا اسکے لئے مانگ؛ یا غیر متنازعہ مالی تشہیرات پر مشتمل سمجھا جانا چاہئے۔
کوئی تھرڈ پارٹی کانٹینٹ، نیز XM کے ذریعہ تیار کردہ کانٹینٹ، جیسے: راۓ، خبریں، تحقیق، تجزیہ، قیمتیں اور دیگر معلومات یا اس ویب سائٹ پر مشتمل تھرڈ پارٹی کے سائٹس کے لنکس کو "جیسے ہے" کی بنیاد پر فراہم کیا جاتا ہے، عام مارکیٹ کی تفسیر کے طور پر، اور سرمایہ کاری کے مشورے کو تشکیل نہ دیں۔ اس حد تک کہ کسی بھی کانٹینٹ کو سرمایہ کاری کی تحقیقات کے طور پر سمجھا جاتا ہے، آپ کو نوٹ کرنا اور قبول کرنا ہوگا کہ یہ کانٹینٹ سرمایہ کاری کی تحقیق کی آزادی کو فروغ دینے کے لئے ڈیزائن کردہ قانونی تقاضوں کے مطابق نہیں ہے اور تیار نہیں کیا گیا ہے، اسی طرح، اس پر غور کیا جائے گا بطور متعلقہ قوانین اور ضوابط کے تحت مارکیٹنگ مواصلات۔ براہ کرم یقینی بنائیں کہ آپ غیر آزاد سرمایہ کاری سے متعلق ہماری اطلاع کو پڑھ اور سمجھ چکے ہیں۔ مذکورہ بالا معلومات کے بارے میں تحقیق اور رسک وارننگ ، جس تک رسائی یہاں حاصل کی جا سکتی ہے۔
