Monday, 15 February 2016

It’s 2013 All Over Again as Bets On a U.K. Rate Cut Soar

in World Economy News 15/02/2016

U.K. investors are harking back to 2013 and increasing bets the Bank of England will need to do more to stimulate the economy.
The last time traders were this certain the central bank would cut its benchmark rate was almost three years ago, when a minority of officials, including then-governor Mervyn King, voted to expand the asset-purchase program.
Ultimately, no more stimulus was added. Still, back then unemployment was close to 8 percent, wage growth was stuck around 1 percent and King was arguing the recovery wasn’t strong enough to be sustainable.
Now, under the stewardship of Governor Mark Carney, the jobless rate has dropped to 5 percent and wage growth has almost doubled. Still, a financial-market rout, fears of an international slowdown and Britain’s upcoming referendum on its membership of the European Union are clouding the outlook.
“The macroeconomic picture for the U.K. is very different than in 2013,” said David Tinsley, an economist at UBS in London. “There are some things to be concerned about and there is a tail risk, but not sure right now the odds the Bank of England would be in a position to cut are anywhere near 60%.”
Tinsley’s comments underscore a disconnect between economists, policy makers and markets that seems to be widening as volatility intensifies. The benchmark rate has been at a record-low 0.5 percent since 2009.
While Carney and his colleagues on the Monetary Policy Committee insist the next move is more likely to be up, and the majority of economists see an increase before the end of the year, futures contracts continue to suggest the opposite. One measure projects the chances of a 25-basis-point cut by the central bank’s November meeting are 62 percent.
While risks emanating from the U.K.’s `Brexit’ vote are distorting the picture, it’s unclear how long the other factors will endure.
“That aspect will persist until the vote,” said Philip Rush, an economist at Nomura Holdings Inc . in London. “That’s only part of the story. General gloomy risk appetite is more important, magnified by herding in illiquid markets.”

Source: Bloomberg