The BoE governor Weale came out saying that bank officials need more evidence before a rate cut and the August cut many expect is not a given. This is one of a latest string of trends where officials are seeing resiliency in the markets after Brexit. What this will do to expectations and the markets has yet to be seen.
In the near term the talk of things not being as bad as many feared can be a good thing. An overreaction by officials could bring about even more uncertainty and become self-fulfilling to the greater economies. Many central banks are now in a ‘wait and see’ mode in order to assess what the real toll of the Brexit to employment, spending, and inflation. In some countries in Europe this has exacerbated some issues that were already present and has no doubt put business investment on a slower path. But overall there is some hope that the new UK government, dialogue between the UK and EU, and central banks monitoring the situation will keep the economy moving along.
In the longer term the language out of the BoE and elsewhere could again raise the question of whether the markets are expecting too much accommodation from central banks as a result of the market shocks. Not taking into account the mandates that central banks have to look at could expose a disconnect between market interest rates and even equity prices. Equities have seen a rise from the post Brexit lows from the classic self-reinforcing assumption that market turmoil will lower rates as investors run to safety, then lower rates or more stimulus will keep rates lower, boosting the attraction of equities.
As rates go into negative territories in Europe and Japan, the desire for central banks to stay at these levels will wear thin. Any outlook to the contrary of the doomsday scenarios that the markets priced in could be dashed by the data coming out in the coming months as well as central bank speeches.