- BoE a headwind for GBP

- Departure of Haldane unsupportive

- GBP falls justified says Commerzbank

Above: File image of Bank of England Chief Economist Andy Haldane. Image courtesy of the Bank of England, accessed Flickr. Reproduced under CC conditions

The fall in value in the British Pound witnessed in the wake of the June 24 Bank of England policy update is justified according to analysis from Commerzbank.

In particular, the departure of Chief Economist Andy Haldane from the Bank of England (BoE) is seen to be setting the central bank for a prolonged 'dovish' phase where interest rates are kept at record lows and quantitative easing is kept generous.

According to Commerzbank this dovish stance justifies the fall in value of the Pound, and as this publication notes here, it could serve to exacerbate the "epic" housing bubble that is growing in the UK and across the developed world.

"As we had feared the FX market reacted sensitively to the Bank of England’s monetary policy decision. Sterling struggled after all members of the monetary policy council except for the BoE’s chief economist Andrew Haldane voted for an unchanged continuation of the current monetary policy," says Esther Reichelt, FX and EM Analyst at Commerzbank.

The BoE's cautious stance on reducing stimulus comes despite a relatively upbeat set of observations on the economy's current situation, where inflation is turning hot and employment is doing better than expected.

Indeed, the BoE's own economists have revised up their forecasts for the economy over the past month.

Economists at the Bank revised up their expectations for the level of UK GDP in 2021 Q2 by around 1.5% since the May Report, as restrictions on economic activity have eased, so that output in June is expected to be around 2.5% below its pre-Covid 2019 Q4 level.

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The BoE now estimates that total economic output will be only around 2.5% below the level prevailing at the end of 2019, despite the economy having contracted 9.9% last year when ‘non-essential businesses’ spent around four months with their doors closed in an effort to contain the coronavirus.

“CPI inflation is expected to pick up further above the target, owing primarily to developments in energy and other commodity prices, and is likely to exceed 3% for a temporary period,” the BoE said when announcing the Monetary Policy Committee’s decisions for June.

But the cautious nature of the Monetary Policy Committee (MPC) shone through an unanimous vote to keep interest rates unchanged and only one member of the MPC - Andy Haldane - voted to reduce the size of quantitative easing.

"The Bank of England's latest statement is a little more upbeat than might have been expected, but crucially offers no new clues on rate hike timing," says James Smith, Developed Markets Economist at ING.

Any optimistic takes on the economy by the BoE are ultimately neutered by their guidance stating much of the strength will likely prove temporary in nature.

"Even if the BoE does recognise that the downside risks for the economy have eased the central bankers signalled yesterday that their focus continues to rest on these downside risks so that they wanted to ensure that the economic recovery was not threatened by a premature tightening of monetary policy," says Reichelt.

This in turn allows the BoE to sit on an ultra-accommodative stance until 2022 at the earliest, and for the Pound this has significant implications says Commerzbank's Reichelt who notes the MPC might become even more 'dovish' than they currently are.

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"A hawkish voice that will fall silent as Haldane will leave the Bank of England at the end of the month. That leaves a monetary policy committee that will become even more dovish following his departure," says Reichelt.

The British Pound fell sharply in the wake of the BoE event suggesting that those holding Pounds required a strong signal that an interest rate rise was moving closer.

This signal was not forthcoming and strategists at Commerzbank are not convinced it will be forthcoming in the foreseeable future either.

"These are not promising signals for GBP bulls," says Reichelt.

The economist says despite growth and inflation developments coming in above expectations the BoE does not see any reason for an imminent end of its expansionary monetary policy.

"Yesterday’s GBP weakness seems justified to me against this background," says Reichelt.