BoE: Stitch In Time Saves 9

BoE: Stitch In Time Saves 9

Neil Wilson  | Jan 13, 2020 11:18

  • MPC front runs eco data with dovish remarks
  • Window to cut rates in Jan
  • Gilt yields, pound weaker

A stich in time saves nine, and so an early rate cut is just what the nine-strong MPC is about to order. Markets are moving swiftly to price in an interest rate cut by the Bank of England, after MPC rate setter Gertjan Vlieghe set tongues wagging about a possible rate cut by the Bank as early as this month. Some nasty GDP and manufacturing numbers for November seem to have been front run by the MPC.

He said: "I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.” Vlieghe’s comments build on those by governor Mark Carney and rate setter Silvana Tenreyro. Vlieghe is a known dove but the picture that has been constructed over the last week is no accident. Michael Saunders, who voted to cut at the last two meetings of the Bank of England, will be speaking on Wednesday, when we would of course expect him to carry on the rhetoric.

What would constitute ‘significant improvement’ according to Vlieghe is not entirely clear, but today’s GDP and manufacturing numbers only make a cut this month more likely – the numbers certainly don’t add up to a pickup by any measure.

GDP –0.3% vs 0% expected

Manufacturing production –1.7% vs –0.2 expected

Industrial production –1.2% vs 0% expected

GDP declined by 0.3% in November against a flat reading expected, although in the three months to Nov the economy grew a little more than expected. Worth remembering that this data is backward looking and before the Tory victory, but this only adds to the sense that the BoE has a neat window of opportunity to cut this month.

As I explained in the morning note, there is a sense the Bank doesn’t want to get behind the curve of market expectations, and is seeking to get a jump on markets whilst still teeing up the cut. It would be following the Fed’s playbook in cutting early in order to prevent a downturn. This is the key thing to remember – the Bank does not want to let a weaker economy fester.

And whilst there is no trade deal with the EU, the MPC has been largely released from the shackles of Brexit uncertainty following the Conservative victory last month. Political risk has hobbled the MPC but this has diminished greatly and now is the window – before a possible clash with the EU in the spring that would make policy changes more political in nature – to get a cut in the bag to juice the economy.

Moreover, one can imagine that the Bank had sight of these numbers and wanted to get the first punch in with some dovish comments from policy makers.

The pound softened markedly and gilt yields declined in rapid fashion, with markets now pricing a 50% chance of a rate cut this month, which is up from around 5% as recently as Friday.

GBP/USD is struggling to cling to the 1.30 round number support, sinking as low as 1.29650. With the 23% Fib level at 1.3140 having been taken out, a move to the 38.2% level at 1.2920 is possible should 1.30 fail to hold by the close today. I did think that, on balance, there is a good chance the bulls defend this level today but the weak GDP and manufacturing numbers make it look very tricky.

Utilities rose to the top of the FTSE after Vlieghe’s comments combined with the softer eco data sent UK gilt yields tumbling. The policy-sensitive 2yr gilts dropped a tenth to 0.482%, while 10yr gilts declined to 0.752%. Bond proxies Centrica (LON:CNA), United Utilities (LON:UU) and Severn Trent (LON:SVT) all rose over 2% as a result to top the leadersboard as the FTSE made broad but slim gains.

Neil Wilson

Related Articles

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (USA) English (India) English (Canada) English (Australia) English (South Africa) English (Philippines) English (Nigeria) Deutsch Español (España) Español (México) Français Italiano Nederlands Português (Portugal) Polski Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 简体中文 繁體中文 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
Saving Changes


Download the App

Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors. is better on the App!

More content, faster quotes and charts, and a smoother experience is available only on the App.