Pound falls as BoE's Saunders says Brexit uncertainty may mean rate cut

The pound fell on Friday after a Bank of England policymaker said interest rates may need to be cut if high levels of uncertainty over Brexit persisted.

Michael Saunders, a member of the bank's rate-setting Monetary Policy Committee, said if the UK managed to avoid a no-deal Brexit, monetary policy “could go either way and I think it is quite plausible that the next move in Bank Rate would be down rather than up”.

The pound fell 0.4% against the dollar and euro at 1.2281 and 1.1241 respectively after his remarks.

“One scenario is that Brexit uncertainty falls significantly and global growth recovers a bit... In this case, some further monetary tightening (limited and gradual) is likely to be needed over time,” Saunders told a gathering of local business leaders in Barnsley.

“Another scenario, and this is perhaps more likely to me, is of prolonged high Brexit uncertainty (even without a no-deal Brexit actually occurring). In this case, it might well be appropriate to maintain a highly accommodative monetary policy stance for an extended period and perhaps to loosen policy at some stage, especially if global growth remains disappointing.”

UK Prime Minister Boris Johnson is insisting that he will take Britain out of the European Union by October 31, with or without a deal. However, he is now at loggerheads with MPs, who have passed legislation to block a no-deal departure.

Saunders said he believed that even if a no-deal was avoided, high levels of Brexit uncertainty would persist and act as a kind of "slow puncture" for the UK economy, having already caused underlying growth to slow to a crawl.

In a slide for his audience, Saunders said the high level of Brexit uncertainty was broadly based across industry sectors, “reflecting the widespread impacts...across the economy”.

The three sectors reporting the highest levels of uncertainty were wholesale and retail, which are most reliant on EU imports, accommodation and food, the largest user of EU migrant labour, and manufacturing which is the biggest exporter to the EU.

Analysts were puzzled by the pound's fall as they believed the possibility of a rate cut had been factored in by traders.

"Quite why this is moving the markets is unknown to be honest with the biggest surprise being that this is seen as a surprise at all," said XTB's david Cheetham.

"Economic data has been poor on the whole and while it looks like a technical recession will be avoided with a rebound to GDP growth probable in the 3rd quarter, the levels of activity seen in other metrics such as retail sales and PMIs suggest that the economy is still barely keeping its head above water."

"Throw in the almost universally acknowledged continued levels of heightened uncertainty on the political front, with markedly divergent Brexit paths still possible and it is actually pretty shocking that a comment that a rate cut is “quite plausible” has caused such a response.

Markets.com's Neil Wilson said there was some "serious risk" the pound could decline from here into the middle of October on the uncertainty and heightened risk of no deal.

"This would then be the make or break moment – extension agreed and we easily pop back to 1.25, no deal and it’s down to 1.15 or even 1.10," he said