WEBVTT - HFE's Weinberg Sees BOE Disappointing on July Rate Cut (Audio)

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<v Speaker 1>Global business news twenty four hours a day. If Bloomberg

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<v Speaker 1>This is a Bloomberg Business Flash from Bloomberg World Headquarters.

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<v Speaker 1>I'm Katherine Cowdery. A third day of gains on Wall Street.

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<v Speaker 1>Markets are showing further signs of stabilizing after wide swings

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<v Speaker 1>in the wake of Britain's decision to leave the European Union.

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<v Speaker 1>Consumer staple shares are leading the way, as Hershey rallies

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<v Speaker 1>her She's been up as much as twenty one percent

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<v Speaker 1>after report that Mondale International made a takeover bid for

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<v Speaker 1>the chocolate maker. Trading and its shares has been halted

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<v Speaker 1>pending an announcement. The SMP Utilities Index is traded at

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<v Speaker 1>a record high today. We took the markets every fifteen

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<v Speaker 1>minutes throughout the trading day. DAL Industrial Average is up

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<v Speaker 1>two hundred sixteen points one percent at seventeen thousand, nine

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<v Speaker 1>hundred ten. SMP five Funded up twenty five points one

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<v Speaker 1>point two percent at two thousand ninety five. The NAZDAC

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<v Speaker 1>is up forty nine points, a gain of one percent.

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<v Speaker 1>It's trading at eight. West Texas Intermedia Crude oil down

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<v Speaker 1>sixty eight cents of barrel one toe sparckled down five

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<v Speaker 1>dollars announced at and the tenure treasury is up ten

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<v Speaker 1>thirty seconds with the yield of one point for eight percent.

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<v Speaker 1>And that's a Bloomberg business flash. You're listening to taking

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<v Speaker 1>Stock with Kathleen Hayes and Pim Fox on Bloomberg Radio.

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<v Speaker 1>Political uncertainty, a recession perhaps baked in the cake. Now,

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<v Speaker 1>that's all that's going on in the UK, and more

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<v Speaker 1>since the vote last week to leave the European Union

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<v Speaker 1>joining us now to look at what's next for that economy,

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<v Speaker 1>what it means for the British pound. Is Carl Weinberg,

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<v Speaker 1>chief economist managing director at High Frequency Economics. So Carl,

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<v Speaker 1>first of all, let's get right into Mark Kearney's speech today.

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<v Speaker 1>He suggested very clearly that the Bank of England is

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<v Speaker 1>ready to cut its key rate this summer. UH some

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<v Speaker 1>are already saying they'll be two rate cuts, one of

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<v Speaker 1>one in July one in August. And he also said, well,

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<v Speaker 1>let's start with the rate part. In my view, and

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<v Speaker 1>I'm not pre judging the views of other independent members

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<v Speaker 1>of the NPC, the economic outlook has deteriorated and some

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<v Speaker 1>monetary policy easing will likely be required over the summer. Carl,

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<v Speaker 1>what do you what do you what do you make

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<v Speaker 1>of this? Was this a surprise? Well, um, yes and no.

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<v Speaker 1>And first of all, any time Mark Arney talks about

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<v Speaker 1>cutting rates is a surprise because if you look at

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<v Speaker 1>his career, both in Canada and the UK, it's always

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<v Speaker 1>been you know, rates have been too low for too long,

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<v Speaker 1>they have to go higher, And of course with that

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<v Speaker 1>comes to the caveat that he's never actually hiped rates

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<v Speaker 1>on those threats, so that when he talks about easing,

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<v Speaker 1>you have to take a deep breath and you know,

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<v Speaker 1>wonder how much of this is you know, conditioning us

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<v Speaker 1>for expectations rather than actually prepared to do something. I think,

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<v Speaker 1>in terms of the mechanics the way it works, he

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<v Speaker 1>laid out in his speech pretty clearly a plan, which

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<v Speaker 1>is they're going to talk about it in July, but

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<v Speaker 1>they've got to come up with new forecasts and new

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<v Speaker 1>options for August. So I think that maybe they made

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<v Speaker 1>disappoint markets in July, but probably will ease in August.

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<v Speaker 1>One thing to keep in mind about all of this

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<v Speaker 1>is that in order to justify a cut in interest rates,

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<v Speaker 1>they have to have some forecast that tells them that

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<v Speaker 1>the inflation target is going to be violated, and to

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<v Speaker 1>make that forecast they need some idea about a policy setting,

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<v Speaker 1>and policy, as we all know, is extremely up in

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<v Speaker 1>the air right now without even a prime minister to

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<v Speaker 1>make it, let alone a Parliament to approve it. So

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<v Speaker 1>I think that waiting until August will give them a

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<v Speaker 1>chance to come up with some plausible scenarios and some

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<v Speaker 1>crude expectations for policies so they can justify a change

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<v Speaker 1>in rates. I think it's going to be August. Carl

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<v Speaker 1>explained to us why this um this certainty or you know,

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<v Speaker 1>some amount of data suggesting that the inflation target will

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<v Speaker 1>be violated. Presumably then to the downside is necessary because

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<v Speaker 1>again in the latest Bloomberg survey done by a Bloomberg

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<v Speaker 1>intelligence team in London, of the economist survey to see

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<v Speaker 1>a recession over the next couple of years, they're evenly

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<v Speaker 1>divided between this year and next. Only twenty nine percent

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<v Speaker 1>are saying a recession at off. There's a recession on

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<v Speaker 1>the horizon. Isn't that enough justification for a re cut? Well,

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<v Speaker 1>the Bank of England, like the FED, has a mandate

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<v Speaker 1>and its mandates are to support the unemployment objectives of

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<v Speaker 1>the government, and primary UH mandate is to hit the

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<v Speaker 1>inflation target, which is two percent year over year increase

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<v Speaker 1>in CPI. So UH most importantly he has to be

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<v Speaker 1>focused on the inflation number, and by saying he's going

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<v Speaker 1>to ease, he's saying he has a premonition that we're

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<v Speaker 1>going to see the inflation rate actually drop substantially further

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<v Speaker 1>than it has already. Headline CPI is around zero. Core

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<v Speaker 1>CPI is around one in a fraction percent in the UK,

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<v Speaker 1>so that have to be a substantial flowdown and substantial

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<v Speaker 1>increase in splack. That's all good, is a back of

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<v Speaker 1>an envelope calculation, but to be the basis for justifying

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<v Speaker 1>and easing of monetary conditions, he's going to have to

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<v Speaker 1>show that in a forecast in the Bank's inflation report.

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<v Speaker 1>This is a very well established process that they don't

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<v Speaker 1>work on the basis and back of the envelope, and

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<v Speaker 1>I think kinds of statements they act on the basis

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<v Speaker 1>of model based forecasts and other kinds of formal forecasting techniques.

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<v Speaker 1>So they're going to have to run this through their

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<v Speaker 1>model and make their models show them that there's going

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<v Speaker 1>to be an inflation undershoot, or at least a good

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<v Speaker 1>likelihood thereof, and they need more input from the policy.

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<v Speaker 1>So I had to be able to do that. What

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<v Speaker 1>does this mean for the pounds sterling down against the

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<v Speaker 1>dollar after Mark Kearney suggested that rate cuts are a

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<v Speaker 1>very strong possibility anyway, And of course this pound sterlings

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<v Speaker 1>tumbled since Paul's closed. Yeah. Well, what he's done is

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<v Speaker 1>he's indicated what we used to call instead days. And

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<v Speaker 1>I know you remember this, Kathleen, a bias towards easings.

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<v Speaker 1>You know, this is a statement of his personal buyo

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<v Speaker 1>is at least to it easy. And the market has

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<v Speaker 1>taken that as a promise of lower rates to come,

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<v Speaker 1>and they are doing what they've been told to do,

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<v Speaker 1>which is discounting that bias as being a premonition of

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<v Speaker 1>what's going to happen. I'm not saying that he can't

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<v Speaker 1>do this. I suspect he probably will, but he's just

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<v Speaker 1>not going to be able to do it between now

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<v Speaker 1>and the MPC meeting in July. UM. As far as

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<v Speaker 1>the markets, though, the market is always right and the

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<v Speaker 1>market believes that there's a rate high coming soon, and

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<v Speaker 1>whether as soon as July or August, it's changes the spread,

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<v Speaker 1>it lowers the attractiveness of the UK assets even more

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<v Speaker 1>to foreign investors, and that's going to mean the cheaper pound.

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<v Speaker 1>You know. Markets also deferred this morning on selling off

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<v Speaker 1>after the current account numbers came out. But the current

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<v Speaker 1>account numbers have been just appalling. And we've been warning

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<v Speaker 1>readers of high frequency Economics for a long time that

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<v Speaker 1>a Sterling crisis is a potential outcome of running a

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<v Speaker 1>current account deficit as big as seven percent of GDP,

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<v Speaker 1>and the numbers we saw this morning were that order

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<v Speaker 1>of magnitude and not getting any better. So I think

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<v Speaker 1>there are a lot of reasons for Stirling to cheapen,

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<v Speaker 1>and that Carney's statement today probably catalyzed some of that thinking,

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<v Speaker 1>maybe a little bit firmer on the side of all right,

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<v Speaker 1>Carl Weinberg, thank you so very much for so eloquently

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<v Speaker 1>summing up the uh the forces that are facing Mark Harney.

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<v Speaker 1>He's head of the Bank of England. As he looks

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<v Speaker 1>at the possibility his own bank forecast a deep recession

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<v Speaker 1>if this Brexit vote goes through. So Carl putting out though,

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<v Speaker 1>that he's a couple of hurdles to cross, and one

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<v Speaker 1>of them, of course, is inflation. Where that is looking

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<v Speaker 1>when the bank offing gets to July. I'm Kathleen Hayes.

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<v Speaker 1>This is taking Stock. My co host Pim Fox on

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<v Speaker 1>vacation this week, and this is Bloomberg. A week from tomorrow,

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<v Speaker 1>the United States Labor Department will re releasing its jobs report.

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<v Speaker 1>In the meantime, we're gonna look at some of the

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<v Speaker 1>big indicators of the labor market as the Fed considers

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<v Speaker 1>its next rate move coming up. This is Bloomberg.