Last year, the Bank of England’s reputation went up in flames when they were late to react to the credit crunch.
Today, they had an opportunity to redeem themselves, but once again, they are behind the curve. The pace of deterioration in UK economic data has increased significantly over the past few weeks, leading many traders to wonder whether the British pound will repeat the dollar’s 2007 weakness. It is not a matter of if, but a matter of when we will see another rate cut from the Bank of England. Traders are now expecting a move in early February, but what difference does it really make to postpone the move by 4 weeks? Oil prices are below $95 a barrel which means that in the immediate future, inflation should not get out of hand. The BoE really missed an opportunity to prevent a more significant slowdown in the housing market and consumer spending. It would be a shock if the minutes for this meeting, due on January 23rd were not dovish. Going into the monetary policy meeting, the market was pricing in a 60 percent chance of a BoE rate cut. We expected a rally in the GBP/USD if the Bank of England left rates unchanged and we did see a 70 pip knee jerk reaction. However the currency pair reversed just as quickly as it has risen, indicating that no one believes the BoE’s December rate cut will be their last. UK industrial production is due for release tomorrow. The deterioration in manufacturing PMI suggests weaker numbers.