The resistible force meets the movable object

The big day is finally here, and perhaps finally Mr. Eriksson  Mr. Capello Mr. Carney will earn some of the magnificent sums that have been bestowed upon him by the UK taxpayer.  The signals have been as clear as they get from the BOE that something is cookin'; then again, the standard of clarity in the Old Lady's communications in recent times has been as akin to that of sending messages to Stevie Wonder via semaphore.

Of course, the weakness of sterling has already injected an easing of monetary conditions more potent than anything that Carney could reasonably hope to achieve; the trick here is probably to do enough so as to not unwind the easing that's already occurred.  Quite a task given the inertia that has engulfed the BOE in recent years; call it the resistible force meeting the movable object.

Leaving aside the question of what the BOE should do, today's meeting hinges on the marked deterioration in sentiment that has engulfed the UK, and the concomitant bearish economic forecasts that have resulted.   As noted several weeks ago, we won't actually see hard data for July until the second half of the month.   The survey data, of course, has been dreadful, which is what Carney and co. will presumably hang their hat on.  The great irony in all of this is that the UK economic surprise index has skyrocketed since the Brexit vote, as the tone of much of the recent hard data has been quite solid.

There are essentially three channels with which the BOE could ease policy: interest rates, credit easing, and QE.  Let's look at each in turn.

Interest rates:  It seems very likely indeed that the BOE will cut rates, probably by 25 bps.   The hints have been strong enough that if rates stay on hold, Carney might find his nose morphing into a proboscis, Pinocchio-style.  The impact of such a move on the real economy is likely to be negligible or even negative if it constrains bank margins and therefore the propensity to lend.   That feeds through into...

Credit easing:  The BOE could resurrect the Funding for Lending scheme that was such a stonking mediocrity a few years ago, and is similar to the current program in the Eurozone that has propelled the banking sector there from success to success.  Make loans, get discounted credit from the BOE to  preserve margins.   Simple, right?   Pity about those regulators and the pressure to reduce balance sheet....In any event, while a FLS scheme may not be universally forecast, it is anticipated in a number of quarters.

QE:  With 10 year Gilt yields at 80 bps it's impossible to argue that the level of long term rates is constraining loan demand or economic activity.  Acting to reduce those yields further could have some perverse effects, particularly within the pension industry, which could easily outweigh any perceived benefits (largely signalling, in your author's opinion.)  The market is split 50/50 on this one, with 21 of 44 economists in the Bloomberg survey looking for an expansion of QE.  Among those looking for QE, the median forecast is for an expansion of 50 bio, with the average looking for an increase of 65 bio.

From Macro Man's perch, the most likely outcome is a 25 bp cut, probably accompanied by a FLS rollout so the Bank can "soften the blow" to bank margins.  While QE wouldn't be a total shock, it probably would be close to totally useless for the real economy, so your author suspects that it will be kept in a glass case labeled "Use Only In Case Of Emergency."

What's it mean for sterling?   Well, cable has had a nice little rally over the last week or so...

...but that probably says more about the dollar than about sterling.   After all, GBP/JPY has fulfilled the prediction of weakness based on the historical study of a few weeks ago, and GBP/AUD hasn't rallied notably despite the RBA rate cut.

In the event that Macro Man is right and the BOE holds off on QE, we'll probably see a bit of a squeeze in cable, given that there is something presumably in the price and the market is short.   Should Carney do a Carney (i.e., do nothing), then the squeeze should be very violent indeed.

However, in Macro Man's mind the bear case for sterling isn't really predicated upon the knee jerk monetary policy reaction, but rather the medium term economic impact of Article 50 uncertainty and the potential withdrawal from the single market.  As such, he'd be inclined to sell rallies in sterling after today's announcement (he is flat GBP at the moment).   The pound is, after all, the movable object, and given the likely persistence of uncertainty and a downturn in activity, the medium term path of least resistance remains down.