Central Bank Watch
For all their bluster following the Brexit vote, central banks have been uncharacteristically restrained during their July meetings. In order of appearance, the Bank of England was clearly in the spotlight after the referendum, with expectations high as BOE Governor Carney practically stated that they would cut rates over the summer. The BOE ultimately decided against introducing a new stimulus package at their July 14th meeting, opting to see what additional fallout would occur after the vote. The timing of the next meeting, which is scheduled for tomorrow, just three weeks after the last meeting, made such a decision logical, and from the market’s perspective consistent with supporting its need for more stimulus in driving risk assets higher. Since July 14th, U.K. data has been disappointing, driving expectations to almost 100% that we will see a rate cut tomorrow. The ECB followed the BOE a week later, convening its July 21st meeting with lowered expectations following the BOE’s lack of movement amidst relatively calm financial markets. Draghi therefore did not disappoint as the ECB also did nothing, stating that it will take time to see and understand all of the implications from Brexit. He nonetheless stated that the ECB was ready, willing and able to act if needed. Given the growing efficacy issues surrounding negative rates, the current odds of an additional rate cut from the ECB remain relatively low, at less than 40% by year end. Instead, the market’s accommodation expectations center on an expansion and/or extension of the ECB’s asset buying program.