India's central bank rate cut is likely to please Modi

Gladys Abbott
February 9, 2019

Speaking on Thursday, Bank of England governor Mark Carney said: "The fog of Brexit is causing short-term volatility in the economic data and, more fundamentally, it's creating a series of tensions".

The pound rejected sub-US$1.29 levels on Thursday even after the Bank of England slashed growth forecasts, indicating underlying strength.

The other factor weighing on the GBP/USD was the Bank of England cutting the growth forecast for the United Kingdom economy lower in the February release of its Inflation report last Thursday.

The bank expects growth this year to be just 1.2% - the slowest since 2009 when the economy was in recession.

Barry McAndrew, ‎fixed income senior portfolio manager at State Street Global Advisors, EMEA, said: "The committee seem happy to wait for some clarity on Brexit negotiations and the economies response to it, before making their next move".

"Governor Das" remark that "there is room to cut' suggests this is not a one and done easing", said Radhika Rao, economist at DBS Bank.

With merely 50 days to go earlier than the nation leaves the European Union, the BOE's nine-member Monetary Policy Committee (MPC), led by Mark Carney, unanimously voted to go away rates of interest unchanged at 0.75%.

Rates are likely to increase further in the coming years, but the timing of any rate hikes remains unclear, particularly with the looming spectre of a possible no deal Brexit hanging over the UK. The Government's regulations, as already enacted, are weakening the impact of the monetary policy, the central bank warned.

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It was possible that Brexit might not be fully "tied up in a nice package" by the end of March, Carney said, but he added that there was also upside for Britain's economy if London and Brussels sign off on a deal.

Sterling at first weakened on the news but quickly recovered to trade flat on the day against the dollar at 1.29 and higher against the euro at 1.14.

Financial markets have cut almost one full quarter point rate rise over the next two years since the last inflation report in November, factoring in just a 50/50 chance of one hike in 2019.

Some economists also felt that there was a danger that a largely independent central bank could come under government pressure - providing too much stimulus for the economy after last week's budget handouts.

The BoE saw a fall this year in business investment and housebuilding, which have been weak in the run-up to Brexit, as well as a halving of the growth rate in exports, reflecting the global slowdown.

The MPC announced on Thursday that it had trimmed its economic growth forecast to 7.2-7.4 percent for the period from April-September this year from its previous 7.5 percent estimate.

The Bank said on the flip side, growth could slump to a potential 0.8 per cent in 2019 should uncertainty persist and financial conditions tighten. "We might see inflation normalizing back to their 3-4 percent range by the middle of this year".

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