U.K. Easing Expectations Prevail

Investors’ see scope for Bank of England easing, even as the U.K.’s political vacuum stabilizes.

What do markets expect?

Rate cut as early as July. In the wake of Brexit, market expectations for U.K. rate normalization disintegrated. Instead, markets see a nearly 80% chance that the Bank of England cuts rates in July and an over 90% chance that it cuts rates by the end of this year. Early June economic data indicate that market confidence is waning, and the Bank may need to cut rates this month to restore growth and inflation expectations.

What is happening in U.K. politics?

May takes over.  On Monday, Andrea Leadsom’s withdrawal from the prime minister campaign implies that fellow Conservative Party member Theresa May will succeed David Cameron. May voted for the Remain campaign, but will be pursuing Brexit negotiations when she takes power this week. May’s early succession adds much needed stability to U.K. politics, easing pressure on the Bank of England to shoulder Brexit’s burden.

How does it affect U.K. policy?

Judicious easing. If the Conservative Party’s intentions unfold according to plan, David Cameron will transfer power to Theresa May on Wednesday night, before the Bank of England’s Thursday meeting. Investors’ anticipation of May’s inauguration perpetuated the global equity rally on Monday, which lessens pressure on the Bank of England to restore economic stability. At a 0.5% benchmark rate, the Bank does not have much room to deploy policy – unless it is willing to go negative – and will likely ease judiciously. The Bank is more likely to wait until August, when it projects quarterly growth and inflation data, over prematurely depleting policy in July.