BoE Delivered Various Measures to Guard Against Post-Brexit Risks

5 August 2016

Rates & FX Market Update

BoE Delivered Various Measures to Guard Against Post-Brexit Risks

Highlights

¨   Global Markets: Markets were surprised with the BoE’s latest easing measures, aimed to bolster the economy against post-Brexit uncertainties; a 25bps rate cut, GBP60bn boost to Gilts purchases, a new GBP10bn corporate bond buying program, and launching a new Term Funding Scheme (TFS) intended at improving rate transmission. BoE also provided clear forward guidance, with the majority of MPC members supporting another rate cut this year “to a level slightly above the zero bound”, while ruling out negative rates at this juncture. We now expect BoE to cut 15bps to 0.1% in November, given the need to assess the effectiveness of the measures, with further adjustments to the non-conventional tools likely if data continues to underperform; stay constructive on Gilts. Post-BoE, investors will be eyeing the NFP print due later today, after the better-than-expected ADP employment changes. A robust print could put a 2016 FFR hike back onto investors’ radar, although lower yields elsewhere are still likely to underpin UST strength; remain mild overweight UST duration.

¨   AxJ Markets: BoE’s easing measures should counterbalance the disappointment from ECB and BoJ previously, with AxJ currencies gaining against the USD this morning on better sentiment. Over in Indonesia, the planned 2016 budget deficit will widen to 2.5% of GDP (previous: 2.35%), requiring additional bond issuances (c.IDR17trn) to cover the shortfall. The impact should be relatively limited, as the additional supply should be well-absorbed; stay neutral IndoGBs. Elsewhere, Finance Minister Jaitley expects the majority of Indian states to approve the GST bill in 30 days, and on track to roll out nationwide by April 2017, which could lift sentiment as the Modi government undertook another major reform step; stay neutral Gsecs and INR.

¨   GBPUSD fell 1.55% overnight post-BoE decision, as the bank overdelivers relative to broad expectations. As widely expected, BoE lowered its 2017 and 2018 GDP forecasts to 0.8% and 1.8% respectively (previous: 2.3%, 2.3%), while lifting its inflation forecasts over the next 3 years in light of the sharp GBP depreciation. With further easing measures remaining on the cards, we stay bearish on GBP over the near term.