Tomorrow the key economic release will be the Bank of England’s interest rate decision. The market is 98% certain there will be at least a 25 basis point rate cut to 0.25%. A majority of analysts also believe that the BOE will increase its asset purchases (QE) from its long, stable level of 375 billion pounds. I DON’T THINK THE BOE IS GOING TO BE AGGRESSIVE AND WILL WAIT TO SEE FURTHER EVIDENCE OF ECONOMIC DATA TO CONFIRM A SOFTENING IN ACTIVITY IS UNDERWAY. A rate cut will accomplish NOTHING except a slight drop in the currency. The recent economic data has been soft but after all the vituperative speech and dire predictions after the vote to LEAVE the European Union, the economy was expected to pause until the market could sort out the hyperbole of negativity.
The initial response has rendered the naysayers WRONG as the British pound has stabilized at an 11 percent drop while the FOOTSIE INDEX has rallied and yields on British debt have actually fallen in contravention to the predictions of the mainstream static thinkers. If BOE Governor Carney were to enact any new stimulus program my suggestion would be to increase the Funding for Lending Scheme first introduced in July 2012. By increasing this program to provide funding to small and medium businesses it would provide capital to the innovative British companies to take advantage of the recent weakness in the British pound relative to its main trading partners.
Mr. Carney, hold off on cutting rates and putting further pressure on pension funds, banks and insurance companies. The BOJ‘s reticence to increase its bond purchases or CUT rates OUGHT to serve as a template for those in doubt of the genuine effectiveness of knee-jerk rate cutting. Governor Carney, KEEP CALM AND CARRY ON.
The Larry Summers movement for a move to global fiscal stimulus gains adherents every day as more and more analysts and economic policy makers are questioning the efficacy of central bank monetary policy and its focus on negative interest rates and massive QE programs. The BOJ’s decision not to change policy in response to the Abe government’s new stimulus plan is gaining traction. In today’s Financial Times, the highly respected Adam Posen of the Peterson Institute wrote: “Abe’s Stimulus Is a Lesson For the World.” The former BOE board member lauded the Japanese for promoting a policy target that is stimulative, in addition to getting structural reform through a change in the labor market. As Posen said: “The point is that interventions in labour markets that initially increase deficits can have salutary longer-term effects on fiscal balances and growth.”
It is time to realize that the massive amounts of central bank purchases of DEBT have realized very little real success except within the bowels of self-congratulatory bowels of academic theorists. Governor Carney, don’t follow Mario Draghi and the ECB down the path of theoretical successes of uber-low yields. Where it all ends NOBODY KNOWS. Stop the cycle of cutting and force to the market to search for dynamic solutions.
***If Governor Carney does cut rates but not increase QE watch the FOOTSIE and the POUND for market sentiment. If the FOOTSIE rallies on less stimulus then the BOE will be correct in less is more and the Brexit fears have been overblown. On any rate cut the POUND will break but the support levels from recent LOWS OUGHT to hold. The 1.3170-1.3225 levels will be a good test and at least an area to establish a low-risk trade. More importantly, if there is NO CUT watch the gilts (10-year British debt) for if the GILTS end the day higher Carney will have made a proper decision. If a rate cut occurs and the GILTS CLOSE LOWER it will be a barometer that a cut was a mistake. The Japanese put a momentary halt to the madness of cutting just to cut. Mr. Carney, your turn: