| | | | Will The Bank of England Cut Rates?
The Bank of England (BoE) is analogous to the U.S. Federal Reserve — as that country’s central bank, they control the UK’s monetary policy, interest rate policy, and more.
That’s why they are such a crucial organization to watch this week… You see, on August 2nd (this Friday), the Bank of England will be hosting a meeting in which its Monetary Policy Committee will come together and discuss interest rates.
England’s rates are currently at a 16-year high of 5.25%, trailing essentially identically with U.S. rates.
But for the past couple of months, Bank of England policymakers have been silent due to rules leading up to the country's election.
Which is interesting, because U.S. Fed chairs have been mostly silent for the past couple of months as well. This puts us in a similar position to England… Investors are left guessing whether rates are going to be cut or not with little input from the powers that be.
As of now, the U.S. market is pricing in multiple cuts, but they’ve been overestimating cuts all year long and we could find ourselves in a Groundhog Day scenario if the Fed delays again in September.
One great way to forecast what might happen in the U.S. is simply to watch the BoE.
Not only do we want to watch their decision, we also want to see how the market and the economy reacts to their decision.
Arguably, most importantly, we will want to see how the very next inflation report looks.
Does the overall optimism spur the economy and give retailers breathing room to lower costs to the point that inflation naturally comes down? Or do we see the opposite?
Let’s face it: The British economy isn’t very healthy. Inflation “coming down” is a lot of smoke and mirrors and they’re playing a delicate game. If things go wrong on a rate cut, inflation could easily (and quickly) spike to recent highs which would be devastating for the economy and seriously back the monetary committee into a corner.
Watching all of those scenarios play out could be a bit of a window into what the U.S. does and how we should position ourselves for the next cut — if it ever comes.
Interest rate futures show a 50% chance of a 0.25% rate cut. A true coin flip… And while most economists still expect a cut, many would not be surprised if the Bank of England waited until its meeting on Sept. 19.
So, if the BoE does indeed decide to cut rates, we need to watch the reaction…
Not only will it shed some light on how the U.S. will respond to a cut, but it might even end up dictating if the Fed cuts at all.
I mean, think about it:
If the BoE does cut rates and it goes very wrong, do you really think the Fed is going to play with that fire — especially right before an election? I think not.
On the flip side, if the BoE cuts rates and the economy responds aggressively positively, the Fed might get more ambitious and aim for bigger cuts.
That’s all speculation of course… For now, it’s a 48 hour waiting game.
While you wait, check out Automated Options - our next trade could trigger this Friday!
— Nate Tucci
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