Treasurys Strengthen as BOE Keeps Rates Steady

Aug 04, 2017, 00:27
Treasurys Strengthen as BOE Keeps Rates Steady

Investors and economists believe the Bank will keep interest rates at a record low on Thursday, although policymakers are expected to remain divided on whether to tighten policy after a 5-3 vote split at its last meeting in June.

July private sector PMI figures this week have been mixed this week, with the manufacturing sector seeing a pickup in activity, whilst the pace of expansion in the construction sector slowed significantly, though this morning's sector PMI numbers will be of far greater influence, the United Kingdom services sector accounting for 80% of the United Kingdom economy.

Kristin Forbes, one of the MPC (Monetary Policy Committee) members to back a rate rise in June, departed the group and was replaced by Silvia Tenreyro, an academic at the London School of Economics.

The bank downgraded its growth projections for 2017 to 1.7 percent from 1.9 percent and that for 2018 to 1.6 percent from 1.7 percent.

"The loss in real income as a result of the depreciation in sterling may also lead to some people wanting to work longer hours to make up that loss", the bank's inflation report said.

The Bank of England is faced with a delicate balancing act: keeping inflation under control - that means near its target of 2% - while trying not to damage the economy.

Nevertheless, as anticipation mounted ahead of the Bank of England's (BoE) August policy meeting and the release of the latest quarterly Inflation Report the mood towards Sterling remained generally positive.

Against the euro, sterling GBPEUR, -0.8070% slid to €1.1073, trading around its lowest level since November.

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Carney on Thursday said that while consumers, in general, had first looked beyond warnings - including by the BoE - that Brexit risked harming the United Kingdom economy, there was no ignoring the fact that sentiment had taken a knock.

Carney said "the assumption of a smooth transition to a new economic relationship with the European Union will be tested" and he said investment levels in 2020 were set to be 20 percentage points below a BoE forecast before the Brexit vote. Moreover, that disparity will hold for the rest of the year, according to the consensus forecast of economists surveyed by Bloomberg News.

The correlation between the FTSE 100 and the pound has returned to negative today, with the FTSE 100 up 1.3% so far and GBP/USD down 1.15%.

2017 Growth forecasts have been reduced again from 1.9% to 1.7% with lower household demand filtering through from the drop in the value of the Pound squeezing prices and household budgets. The Committee voted unanimously to close the drawdown period for the Term Funding Scheme (TFS) on 28 February 2018, as envisaged when the scheme was introduced.

In response to the painfully slow rises this year, the Bank cut its forecasts for wage growth in 2018 and 2019 to 3 and 3.25 percent, down by half a percent for each year.

But a raft of weaker data - as well as deep uncertainty about the impact of Brexit - called that view into question.

Inflation fell and is expected to peak around is expected to remain a bit above target.