Later on today, the Monetary Policy Committee is to meet for the first time since the Brexit vote to discuss interest rates, a decision which could have strong repercussions on the gold price and the situation of national and international markets.
Some suggest interest rates could be cut to a new low and if the rate is reduced, it would be the first change for more than seven years. In response to this, the FTSE 100 surged by 1% in early trades today, hitting an 11 month high. The pound also began to rise and approached the highest level in more than a week versus the dollar. Many suggested that this is a sign that the rate will in fact not be cut today, but will be postponed until the next meeting in August.
Interest rates have been unchanged since March 2009 when in the wake of the financial crisis, the bank lowered rates to a record low of 0.5%. Financial markets suggest the probability of a cut is around 80% with many speculating the rates will drop from 0.5% to 0.25%. However opinions on this are mixed. Mike Bell, of JP Morgan Asset Management, has said today that an immediate rate cut of “at least” 0.25pc is “likely”. However, Jeremy Cook of World First suggest that –
“Opinions are fairly split on this; of the 54 economists surveyed by Bloomberg 23 think that there will be no change today with 25 expecting a cut to 0.25%. The remaining 6 are split equally between cuts to 0.10%, 0.05% and 0%.”
Part of the reason for the uncertainty that an interest rate cut will go ahead is due to a lack of strong economic data. Although the rate cut is designed to provide a boost to the UK economy in the wake of the Brexit vote, the Monetary Policy Committee may choose to wait until the first ‘post-Brexit’ PMI surveys are released before altering monetary policy.
How will this effect gold?
Lower interest rates tend to boost the appeal of non-interest bearing assets such as bullion and gold is historically highly sensitive to interest rate increases.
Over in the US, the Federal Reserve had been widely expected to make one, if not two, rate rises this year but this change is still yet to be actioned. There is also the possibility that interest rates will not change at all. Many suggest that any changes to interest rates are likely to raise uncertainty, tighten financial conditions and increase risk aversion. One of the main assets which performs well in times of market uncertainty is gold as we have already witnessed at various points throughout this year.
Although we have already seen the price of gold steady this morning and in the last few days due to a number of stabilising factors including the appointment of a new prime minister and their associated cabinet, it will be interesting to see how the price of gold changes in the coming days and weeks.