Brexit presents complicated challenge

For a currency whose central bank last night pushed the ‘ease policy’ button, the sterling has been looking perky.

For a currency whose central bank last night pushed the big, red button marked “ease policy,” the sterling has been looking pretty perky of late. That might in part be a consequence of the challenge that Brexit poses to both the Bank of England and currency traders.

At $US1.335, the pound is some 3.5 per cent above the low point hit in the wake of the British vote to leave the EU, and it has gained this week even as last night’s BoE decision loomed, aided by a US dollar that is weakening broadly.

Yet British policy makers clearly signalled there would be action in August. Markit’s purchasing managers’ indexes point to a shock to business in July, with the services sector index recording its biggest one-month drop on record. Many economists were tipping the rate cut from 0.5 per cent to 0.25 per cent and the reactivation of the BoE’s asset purchases.

There are doubts about how effective monetary policy will prove. And the bigger picture around Brexit remains a foggy one: it still isn’t terribly clear when the process will start, or what the final destination for the UK economy will be. Brexit is a diffuse, political challenge, quite unlike a clear economic crisis or market panic. Bank of England governor Mark Carney and his colleagues face a particularly difficult task in charting the future path of the economy.

In recent months, it has paid to bet against heightened expectations of central bank action. The BoE may have painted itself into a corner with a near-promise of action in August. But for both sterling bears and the central bank, there could be an extended wait yet for more flesh to be put on the bones of Brexit.