Minouche Shafik Caps British Pound's Recovery Against Euro and US Dollar, Warns of Further Interest Rate Cuts

Above: Nemat (Minouche) Shafik, Deputy Governor, Markets and Banking. Copyright - The Department of Economics at The University of Warwick. Photographer: Michelle Tennison. Sourced: Bank of England.

Comments from the Bank of England's Minouche Shafik could help explain why the UK currency remains subdued ahead of the month-end.

• The Pound to Euro exchange rate today (30-9-16): 1.1602, this week's best rate best was at 1.1643
• Euro to Pound Sterling exchange rate today: 0.8620, this week's best rate was at 0.8716
• The Pound to Dollar exchange ratetoday: 1.3009, this week’s best rate was at 1.3059.

This week's GBP recovery has been scuppered by Minouche Shafik, the Deputy Governor of Markets & Banking at the Bank of England, who told a summit she believes further monetary easing at the Bank may be required.

Shafik told the Bloomberg Markets Most Influential Summit in London that, “there is no doubt in my mind that the UK is experiencing a sizeable economic shock in the wake of the referendum.”

This lead her on to the clincher of the speech from a currency perspective:

“It seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious.”

Pound Sterling tends to depreciate when the Bank of England cuts interest rates or expands its quantitative easing programme, therefore suggestions that we could see more action on this front is negative for the currency.

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The timing of any further action on interest rates was however left in the air:

"The likely timing of that stimulus will depend on the continued evolution of the data over the coming weeks and months. Thus far, the welcome improvement in the forward looking indicators suggests that the slowdown may not be as sharp or as sudden as we might have feared."

Shafik did acknowledge that the fall in the value of Sterling since the EU referendum will do some of the heavy lifting required to ensure the economy avoids recession.

"Shafik suggested that more easing may be required, even if the economic “radar” is flashing a little less “red”. That sentiment largely reflects the messaging from Governor Carney. We remain fundamentally bearish on the GBP as we expect the Brexit process to weigh on growth and the government’s stance to compromise prospects for the services industry," says Shaun Osborne at Scotiabank.

Scotiabank continue to target 1.25 for GBP/USD at the end of the year. However, a target of 1.19 is forecast for the GBP/EUR.

The Shafik speech contrasts to a pro-GBP speech delivered last week by MPC member Kristin Forbes who suggested no further action from the Bank was necessary.

Forbes told an audience at Imperial College, London, that the impact on the economy of the June 23rd EU referendum had been "less stormy" than had been anticipated.

As such Forbes is, "note yet convinced", that further rate cuts are warranted.

The most likely announcement of another interest rate cut or boost to the quantitative easing programme will come at the November MPC meeting which coincides with the release of the Quarterly Inflation Report.

Quantitative Easing, Low Interest Rates are Here Permanently

Further insights from Shafik reveal some worry for savers with the observation that quantitative easing is here to stay as a standard tool of central bankers.

Furthermore, interest rates are likely to stay relatively low permanently, she said, because of structural and demographic changes in the world economy.

This requires central banks to use other means to ease monetary policy, including quantiative easing which can be bent in many directions, as shown by the Japanese and European central banks.

Bank of England Lending Data Confirms Steady Flow of Money to Economy

The BoE's monetary statistics for August are out and analysts have been scouring them for further signs of any impact to economic activity following the EU referendum.

Consumer Credit was reported to have increased to 1.574BN from the 1.191BN reported in July, analysts were only forecasting a reading of 1.4BN.

This should support retail sales - a key component of UK economic growth - going forward.

Mortgage Approvals were down to 60.06K for the month, down on July’s 60.92K and below the 60.1K anticipated.

It should be noted, however, that activity in the housing market may still be distorted by the impact of April’s rise in stamp duty.

However, the value of mortgage lending increased with a reading of 2.9BN surpassing the previous month’s 2.6BN and beating analyst expectations for a reading of 2.5BN.

The M4 Money Supply grew at 0.9% month-on-month to August, better than the 0.8% figure expected by economists.

"The recent acceleration in growth of the M4 measure of money is seen by some as an indication monetary policy is too loose. Of particular interest will be mortgage approvals, for which we forecast a pickup despite weaker than expected figures earlier this week from the British Bankers’ Association," say Lloyds Bank in a client briefing ahead of the data release.

In all, the data is strong and confirms the financial services sector continues to function well despite the imposition of uncertainty from Brexit.