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Weekly Outlook High Impact News (7/9/2023)
Sunday, July 9
3:30am GBP: BOE Gov Bailey Speaks
At 3:30 am EST, BOE Governor Andrew Bailey will be participating in a panel discussion titled "Central banks as lightning rods for crises" at the Economic Meetings of Aix-En-Provence, in France. This information comes directly from the Bank of England's latest release. Traders consider Bailey's speeches to be more hawkish than expected, which is generally good for the currency. The next time Bailey is scheduled to speak will be on July 10, 2023. As the governor of the Bank of England (BOE) from March 2020 to March 2028, Bailey's speeches often generate volatility as traders attempt to interpret interest rate clues. As the head of the central bank, which controls short-term interest rates, Bailey has more influence over the nation's currency value than any other person. Traders pay close attention to his public engagements, as they are often used to subtly hint at future monetary policy changes.
BOE Governor Bailey
Andrew Bailey, the Bank of England (BOE) Governor, has dismissed the idea of raising the inflation target above 2%. He argues that changing this goal could harm the bank's reputation and make people think they aren't aiming for 2% anymore. Despite current challenges with UK inflation at 8.7%, much higher than the target, Bailey remains confident that they will return it to the target level. He also mentioned they have some flexibility with the timing, extending the usual two-year horizon to three years if needed. Last month, to fight inflation, the UK bank surprisingly increased rates to 5%. Now, people think it may go up to 6.5% to prevent a cycle of rising wages and prices. However, this might lead to a recession. Some people suggest raising the inflation target to 3% to lessen pressure on banks and avoid a slump, but Bailey and François Villeroy de Galhau, the Bank of France's governor, both warned against it, fearing it could damage central banks' credibility.
Bank of England Weekly Report
As of July 5, 2023, Sterling Liabilities stood at £874,351M for reserve balances and £87,006M for notes in circulation, a slight decrease and increase respectively from June 28, 2023. Sterling Assets included £325M in indexed long-term repo, £169,032M in the Term Funding Scheme with additional incentives for SMEs, and £17,389M in Sterling denominated bond holdings. The loan to the Asset Purchase Facility remained constant at £823,792M. Foreign currency liabilities and assets also experienced minor changes, with foreign currency public securities issued increasing to £9,388M, and foreign currency reserve assets increasing slightly to £9,783M.
Analyzing the BOE Report
The Bank of England's recent financial activities show various implications for the UK economy and currency. The decrease in reserve balances suggests a potential reduction in available funds for lending, which may limit liquidity. On the other hand, the increase in notes in circulation indicates more physical currency in the economy, potentially influencing consumer spending.
The bank's sterling assets, such as the indexed long-term repo and funding support for small businesses, signal efforts to stimulate economic activity, boost investment, and support lending. The bank's involvement in sterling-denominated bond holdings can influence the bond market and interest rates, impacting borrowing costs for the government and other entities.
The consistent loan amount to the Asset Purchase Facility reflects ongoing support for asset purchases, affecting market liquidity and bond yields. Changes in foreign currency liabilities and assets reflect the bank's management of foreign currency reserves, which can influence exchange rates and the value of the British pound against other currencies.
Overall, the Bank of England aims to manage liquidity, support economic activity, and maintain financial stability. The effectiveness of these measures and their impact on the UK economy and currency will depend on various factors, including the broader economic conditions domestically and globally.
Roy Dunia
ChartAddicts Analysis
7/9/2023
Disclaimer: The opinions in this article are based on evolving data and may change. They don't represent any official stance. The author isn't liable for any errors or outcomes from using this information.
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