On Thursday the Bank of England will announce its interest rate decision and it looks increasingly likely that the Monetary Policy Committee (MPC) will cut rates for the first time in more than 7 years. The committee have already signalled that rates would most probably be cut after surprisingly leaving them unchanged at the last meeting. Gertjan Vlieghe, who is an external member of the MPC, was the only policy maker to call for a cut last month, is also now calling for a package of stimulus measures to help growth.
Before the June meeting, the swaps markets had priced in an 80% of a rate cut, so were caught flat footed when it didn’t happen, however pricing today shows that they now think there is a 100% chance of rates being cut. Any rate cut will of course put pressure on sterling, with a number of economists predicting that the pound will depreciate versus the US dollar to $1.20 by the end of the year. Economists at Morgan Stanley also sent out a note on their GBP/EUR view. “GBP is going to be responsive to further commentary coming out of the inflation report and will weaken if the BoE is open to further easing measures such as QE or even cutting rates below the perceived lower bound of 10bp”. Morgan Stanley’s target for GBP/EUR is 1.11 adding “UK bond yields being higher than those in the Eurozone, means that UK bond yields have further to fall, supporting our long EURGBP trade”.
Also in the news this morning was the announcement that Didi, a mobile cab-calling app developed by Beijing Xiaoju Keji in China, with over 100 million users in 300 cities, is to merge its business with Uber in China; in deal worth over USD35bn. According to those close to the deal, the pair, which have been burning through cash trying to gain market share, will join forces after the government in China issued guidelines and a framework for the globally booming cab-hailing industry, thus removing much of the uncertainty surrounding firms such as Uber and Didi. In addition to what is effectively Uber selling its China business to Didi, Didi will also make a USD1bn investment in Uber, which will help Uber continue to expand globally outside of China.