King Lowers Expectations For Rate Cut
Sterling rallied around half a big-figure versus the dollar and euro on Wednesday following the BoE’s quarterly inflation report. While the report was clearly dovish, expectations had already factored this into the price and Governor King gave some marginal reasons to buy GBP in the post-report press conference. In the report itself, the BoE cut its GDP forecast to 2.0% in two years (previously 2.5%), while the CPI forecast was little changed at 1.7% in 2 years’ time. The report also noted that a stronger GBP may curb export growth, though this is more a matter-of-fact statement rather than a hint at policy action. The pound rallied when King poured some cold water on the idea that a base rate cut will be forthcoming. King said that cutting the rate would damage some institutions and would in many ways be counterproductive. It is therefore not seen as something that would be done immediately and another 25bp of rate cuts is not seen to make a significant difference. UBS economics believes the BoE will wait to see the effects of the FLS scheme before acting again but has clearly signaled further monetary policy stimulus ahead. Otherwise, the euro continued to underperform while SEK and NOK pushed higher. Overnight, S&P revised its Greece outlook to negative while affirming the CCC rating. The ratings agency projected GDP to contract by 10% during 2012-23, 6 percentage points more than the Troika estimates. It also noted that a severe liquidity squeeze in the Greek economy is visible. In a separate announcement, the ratings agency also took actions on 4 Spanish banks. Japan posted a record trade deficit of JPY 2.5 trn for the first 2 quarters of the year, driven by soft exports. While this development is on the margin JPY negative, the evaporation of the trade surplus is more than compensated by the overall positive international investment position of the country, which will take a long time to reverse. Heading into the BoJ’s two-day meeting, we expect the BoJ to keep its policy effectively unchanged to the disappointment of the doves. The central bank could undertake a few fine-tuning operations, which would not have a material impact on the currency.
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UBS Investment Bank