Sterling bounced by a modest 40-50 bps versus the US dollar and euro following the decision by the Bank of England (BoE) not to cut rates on 30 January. Expectations for any future rate cut have now been pushed out to December by money markets. The market was split on whether a cut was coming with some suspecting that, following BoE Governor Carney’s previous communication, as recently as a few weeks ago, an ‘insurance post-Brexit’ cut was in the works. It seems Carney has lived up to his moniker of being an ‘unreliable boyfriend’ but interestingly those more dovish members seem to have switched to ‘wait and see’ mode as the overall vote was seven to two in favour of holding – two doves compared to four or five expected doves following recent language from these members. This is Carney’s last BoE meeting before he departs the post in March. During his tenure he has presided over just one 25 bps cut in 2016, following the Brexit referendum result, and two rate hikes of 25 bps in 2017 and 2018. That equals a net increase of 25 bps in seven years of service, leaving Carney as the first governor since BoE independence in 1997 to actually depart their role with rates higher than when they started.
Overall the outlook remains quite unclear. We have had a modest ‘Boris bounce’ in survey data but many believe this will be temporary. The government’s budget in March is the real area to focus on – cutting ahead of this largely expected stimulative event might therefore be unnecessary. This likely means that sterling will struggle for any sustained strength going forward – the growth outlook does not look stunning and has been dialled back slightly in the BoE’s updated GDP forecasts from 1.2% to 0.8% in 2020 and 1.4% from 1.8% in 2021.