Monetary Policy

Given where asset prices are at the moment, we would categorise inflation as a low probability, but high impact, risk.

Next month’s budget now has the green light to be Johnson’s fiscal bazooka, with tax cuts, housing schemes and infrastructure projects already mooted.

In what was Mark Carney’s last meeting as governor of the Bank, the MPC delivered a mixed message.

A rate cut now makes very little sense to us, and wastes one of the few bullets the BoE has left in its armoury. If they do decide to cut next week, we think it will be reversed within 12 months.

The European Central Bank faces quite a conundrum ahead of its upcoming monetary policy meeting on September 12. ECB President, Mario Draghi, has clearly signalled that a cut to the refinancing rate (currently at minus 40bp) is likely and markets are now pricing this in with an 85% probability. The problem is, the ECB has also signalled that it will simultaneously consider tiering the bank reserves this rate actually applies to.

The average yield of the bond market today is 1.46%, while its average duration is 7.05 years, going by the widely used proxy of the Barclays Multiverse Index.

Since the two anti-establishment parties (The League and Five-Star) formed a coalition and took control in Italy, markets have been uncertain on the domestic government policy that was promising many things to many people and ultimately creating considerable friction with the European Commission (EC).

It was a dramatic night last night as the Fed cut interest rates by 25bps, the first cut since December 2008, along with the premature ending to the balance sheet run off – however markets hardly moved!

Over the past few weeks there has been a noticeable increase in high yield new issuance, bringing a welcome flurry of activity to what has so far been a relatively benign year.

The euro area bank lending survey for the second quarter of 2019, released yesterday, suggests European banks are becoming more cautious and beginning to tighten lending criteria to various parts of the economy.