Today at 13:00 (GMT+2), investors’ attention will be focused on the interest rate decision by the Bank of England.
It is expected that majority of the Monetary Policy Committee (MPC) will vote for reduction of the interest rate by 0.25 points, to a new record lows of 0.25%. This decision of the bank can be adopted in expectations of future challenges for the UK economy because of Brexit. After the referendum, in the UK, the head of the Bank of England Governor Mark Carney said that more monetary policy easing would be required in the country this summer. He also said that this measure could be introduced at the next meeting of the bank.
Last report of the Bank of England mentioned that the outlook for the financial system stability has become "questionable" after the referendum. Economic deterioration can be also caused by the separation of the country from the EU, as European countries are the most important partners for the UK. Note also that Brexit can provoke slowdown in growth of GDP in the UK and in Eurozone, given the importance of the UK as the second largest export market of the Eurozone after the US. Many economists predict that in addition to the reduction in the interest rate, the Bank of England may resume asset purchase program, which was frozen in 2012.
Currently the pound is traded at the lowest level over the past 30 years. Reduction in the interest rate will lead to further outflow of funds from the UK and sales of the Pound. Despite the threat of recession in the country, the decision to reduce the rate should boost exports and country's economy. But it will take time.
The factor, which can prevent the decrease in the rate in the current situation, can be the rise in prices of property in the UK.
According to the index released today by the Royal Institution of Chartered Surveyors Real estate, housing prices in the UK rose by 16% in June (against the forecast of + 8% and growth of 19% in May). A cheaper Pound can cause overheating of the property market in the country.
If the Bank of England leaves interest rate unchanged at the level of 0.5%, the Pound will rise sharply in the currency market. The pair GBP / USD can grow by over 200 points.