The Bank Of England Stands Down

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What's going on?

Uh oh the British pound fell almost 1% versus other major currencies on Thursday after the Bank of England (BoE) downgraded its assessment of the UK economy and hinted that it would not raise interest rates this year.

What does this mean?

The BoE now thinks the UK economy will grow 1.7% this year, down from its May estimate of 1.9% (by comparison, the US is growing just under 2% and the eurozone a little over 2% so far this year). Faster price rises (a.k.a. higher inflation) are making goods more expensive for Brits, which means consumers arent able to buy as much stuff. Thats a serious problem since consumer spending makes up about two-thirds of the British economy. The head of the BoE also warned that businesses arent spending much (i.e. investing) due to the political uncertainty associated with the Brexit process.

Why should I care?

For markets: Domestic-focused UK stocks are performing worse than stocks in other countries.

The London Stock Exchange hosts many big, multinational companies like the miner Rio Tinto and the pharma giant GlaxoSmithKline. The stock prices of such companies have shot higher as the pounds value has dropped over the past year (largely because their overseas earnings are worth more in pound terms). However, companies that operate predominantly within Britain and are exposed to its weakening domestic economy have fared much worse (especially relative to the big stock price increases seen in most major markets).


The bigger picture: The BoE is firmly back in the cautious central bank camp.

About six weeks ago, the financial world was moderately rocked by suggestions from various major central banks that they would act more urgently to increase interest rates. Around that time, minutes of the BoEs June meeting were released, which showed a number of senior BoE officials arguing in favor of an interest rate increase. However, given the rhetoric on Thursday, the BoE looks like its put any interest rate raising exuberance on ice.

Originally posted as part of the Finimize daily email.

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