The Bank of England took traders and investors by surprise yesterday when it decided to leave the cost of borrowing unchanged at its seven year low of 0.5%. The pound has put in its best week in seven years gaining nearly 4% against the dollar, albeit from three decade lows hit in the aftermath of the Brexit vote.
City analyst Louise Cooper said the Bank of England Governor Mark Carney had created an expectation of a rate rise and it had already been accounted for by the markets. "Within days of the referendum on June 23, he said to expect monetary easing this summer. He only has two MPC meetings in summer and traders had priced in a rate rise in July. This was not what the market had expected. Sterling went up 2% against dollar straight away. As a Central Banker, you should not tell the markets that something is going to happen and not follow through on it," she stated.
Louise Cooper said Mark Carney had form in this regard. "Remember, he has been referred to as the 'unreliable boyfriend' by the Treasury Select Committee. He promised forward guidance. He promised to put rates up when unemployment got to 7%. It did that in three months. Unemployment is now at 5% and now he's talking about cutting," she pointed out.
Ms Cooper said a more sensible move would have been to adopt a 'wait and see' approach without making promises, which is what Mr Carney and the monetary policy committee now appear to be doing. "There is no economic data to suggest a slowdown. This is him anticipating a slowdown, but he's promised it now this summer and markets will be expecting it in August."
The analyst said the Bank of England should have some more economic data at its disposal by August but it is uncertain as to whether it will be enough to guide a move. "At that point, he'll be able to say what he thinks is happening in the economy. If you look at the RNS statements, the phrase I read six, seven, eight times every morning is 'uncertainty' and 'it's too early to tell'. It will be interesting to see if he has enough data to justify a rate cut come August," she concluded.
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MORNING BRIEFS - Microsoft has welcomed an appeals court ruling that the US government cannot force the tech company to give authorities access to its servers located in other countries. The Justice Department had wanted to access a server in Ireland, as part of an investigation into a drugs case. Two years ago, a court in Manhattan granted an order to hand over emails of a suspected drug trafficker stored on the server, but that has now been overturned. The US government had argued that a ruling in favour of Microsoft would create legal loophole that could be exploited by fraudsters, hackers and drug traffickers. It intends to appeal to the Supreme Court.
*** Sterling is on course to put in its best week of gains since May 2009. The currency is trading at $1.3450 in Asia bringing its gains for the week to just shy of 4%. That is its fourth largest weekly rise in the last decade but comes just weeks after the currency sank to a 31 year low following the vote by the UK to leave the EU. The gains came on a week that saw a new Prime Minister move into number 10 and the Bank of England surprised investors by leaving interest rates unchanged at 0.5%.
*** Shares in the Japanese messaging app Line have surged by over 30% in its trading debut on the Tokyo stock exchange and by over 20% in New York. It makes it the biggest tech listing this year. Line is the most popular messaging app in Japan and Thailand where it claims to have more users than Facebook and Twitter. The company raised over $1.1 billion in its dual listing.
