UK: Amongst politics, BoE in focus - Rabobank

Research Team at Rabobank, suggests that a new era dawns for the UK as new PM Theresa May is setting up her shop.

Key Quotes

“Yesterday, May chose Boris Johnson for the post of foreign secretary. David Davis will be overseeing the exit-talks, while Liam Fox will be responsible for the negotiations on new trade deals. This move puts, as could be expected, a number of people from the ‘Leave’ camp in charge of the UK’s foreign policies.

While the market may welcome some additional clarity on the UK-front, the question is whether this newly formed government can (will?) also act swiftly. May and Davis have both expressed a preference to wait before invoking Art. 50, which could delay the start of any talks– we’re not in calm waters yet.

With the government effectively paralysed until yesterday, the Bank of England has been quite proactive in response to the Leave vote. Following the weekly repo operations and the Financial Policy Committee’s decision to remove the counter cyclical buffers for UK financial institutions, the market is now speculating that this could be followed by a BoE rate cut potentially as soon as today’s policy meeting.

However, as Jane Foley explains in her note, we take a more cautious view on the outlook for the Bank Rate. In an effort to avoid spurring volatility in the exchange rate we consider it likely that the MPC may favour a targeted policy response as part of its initial efforts to sooth the economic adjustment. The Bank may decide to reserve a rate cut for a later date if the outlook fails to stabilise.”