Bank of England holds rates disappointing traders

May 16, 2017

The Bank of England monetary policy committee met on Thursday, and elected to keep interest rates on hold at 0.25% and maintain the current quantitative easing programme. While this was broadly as expected, the outward looking statements caused the pound to fall slightly. Traders were disappointed that policy makers are not keener to raise rates sooner, as well as the small cut to the Bank’s growth forecasts. As the Bank of England falls further behind the rate rising schedule of the Federal Reserve, there will be an continuing negative pressure on the currency as investors prefer to hold the higher yielding dollar over the pound.

With the general election fast approaching, it is looking increasingly likely that the Conservatives will secure a significant majority. The polls are indicating that the Conservatives will win nearly 50% of the popular vote and equating to an 18 point lead over Labour. The Conservatives seem to be appealing to a broad range of the electorate, securing a large majority of leave voters as well as many of those who voted remain and are looking for a way to make the best of the result. While Theresa May is calling to be given a strong negotiating platform for the upcoming EU negotiations, the result of the election is unlikely to impact the final outcome. However, more importantly, it will provide continuity for the period following the end of the Article 50 two year window.

Chinese trade data for April was released on Monday last week. Exports in dollar terms rose year on year at a rate of 8% while imports rose 11.9%, both missing expectations. While the country is continuing to run a trade surplus, the exceeding growth of imports relative to exports should address this imbalance over time. Chinese authorities have been making conscious policy decisions to address the trade balance. Notably the US and China signed a trade deal last week, opening up their countries to certain industries, aimed at reducing the high imbalance between the two countries. Furthermore, the emerging middle class in China has an increasing desire for foreign imported goods, in contrast to the heavy industry exporting model that dominated the economy over previous decades.

Index Open Close Change % Change
FTSE 100 7297 7435 138 1.89%
S&P 500 2399 2390 -9 -0.38%
Dax 12716 12770 54 0.42%
Cac 40 5432 5405 -27 -0.50%
Nikkei 225 19445 19883 438 2.25%
UK 10 Year Gilt Yield 1.12 1.11 -0.01 -0.89%

 

UK unemployment figures released on Wednesday.