BoE decision to drop rates will have major consequences

In the middle of July the Bank of England was expected to drop interest rates to a new all time low in its history but governor Mark Carney held off the destined move saying the impacts from Brexit had yet to show through in the economic data officials had used to guide them in their decision possibly showcasing some sort of integrity still left in a major central bank.

Three weeks later and the BoE now has a clearer picture to where the British economy is headed with many believing the latest set of economic indicators allow the central bank enough reason to lower the benchmark interest rate for the first time in seven years.

At the time I wrote an article detailing why I thought that a drop in interest rates in the UK would add further pressure on the US Federal Reserve who subsequently opted for normalisation of rates rather than continuation of quantitative easing measures to remain in place.

In years to come hindsight will afford us the lesson of realising that the Fed's decision to go against the majority of its significant counterparts could've possibly be the right course of action but the effects of globalisation together with the alignment of countries economic policies to steady the world's direction of activity might've played a hand in unhinging any common sense that would've entered the fray.

If the BoE does indeed cut rates it simply yields to the coercion from fellow central banks who protect torpid governments who fail to enact the necessary actions to revert an economic crisis of epic proportions from taking place.  

First UK interest rate #BoE cut in seven years expected | #Brexit pic.twitter.com/x98b2ghsJ4

— Andrea Aquaro (@AndreaAquaro) August 4, 2016

Can we imply further NIRP if the BoE lowers rates?

Just as the United Kingdom received a new prime minister yesterday in Theresa May's appointment to Britain's political hot seat, focus now shifts to the Bank of England's interest rate decision with pundits expecting BoE governor Mark Carney to drop rates for the first time in seven years.

At first glance it appears the decision will be made as a reactionary measure following the developments concerning Brexit which probably holds the greatest weight in the argument to edge rates to all time lows. Needless to say it can also be seen as a coercive coordination in responding to the re-instituted quantitative stimulus by its developed nation counterparts such as the European Central Bank and the Bank of Japan.

It's prudent to be reminded that although interest rates in the UK currently sits at all time lows of 0.5%, the central bank has an arsenal of monetary tools its able to enact to fight off dangers to the economy. It briefly paused its bond buying program in 2012 when other banks opted to continue and still extensively rely upon it but to no avail.

In the past four years the BoE has resisted the temptation to restart these programs however we need to question the British economy's capability in shielding itself from additional bond purchases that's ridden the strength of the British Pound since 2012 when stimulus was paused and in the light of the drastic economic upset from the Brexit vote to leave the European Union.

If the strength with which the British economy boldly defended its monetary policy stance has been wounded badly by the future outlook, then it brings into question the validity over the distorted might of the US economy that's hardly churned out economic growth sufficient to create waves in the global economy. It would suggest that it too is susceptible to becoming influenced by its fellow central bank counterparts exploring the riskiness of negative interest rate policy.

The BoE's decision will impact the global financial system more than simply the confines of its own economy with an action of lowering rates placing pressure on the US Federal Reserve in defending its case of normalisation of interest rates and in saying this implicitly suggest that its influence of directing world economic policy has been tremendously harmed.    

BOE set to cut rates for the first time in 7 years on Brexit backlash - MarketWatch https://t.co/MW7uuokkhN

— Rod McAlpine (@Rod1015) July 14, 2016