The Bank of England could cut interest rates to bolster the British economy, potentially supporting currency-hedged exchange traded fund strategies as a United Kingdom play.
Bank of England Governor Mark Carney said the central bank could cut interest rates in the months ahead to support growth in the wake of the Brexit shock and ensuing uncertainty, reports Scott Hamilton for Bloomberg.
“It now seems plausible that uncertainty could remain elevated for some time,” Carney said. “The economic outlook has deteriorated and some monetary policy easing will likely be needed over the summer.”
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U.K. markets rallied on the news while the British pound weakened. For instance, the iShares MSCI United Kingdom ETF (NYSEArca: EWU), a non-currency-hedged U.K. ETF, gained 2.1% on Thursday while the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) dipped 1.5%, with the GBP dropping 1.5% to $1.3226.
Alternatively, the currency-hedged United Kingdom ETFs have provided a purer play on the underlying British market as the GBP depreciated against the USD.
On Thursday, the Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK) increased 2.9%, iShares Currency Hedged MSCI United Kingdom ETF (NYSEArca: HEWU) gained 3.5% and WisdomTree United Kingdom Hedged Equity Fund (NasdaqGM: DXPS) advanced 2.6%.
[related_stories]A dovish BOE monetary policy would help support U.K.’s economy but it would also weigh on the British pound. Consequently, U.S. investors who are interested in tapping into U.K. markets may consider currency-hedged ETF options to limit the currency risks.
Chris Hare, an economist at Investec in London and a former BOE official, argued that the markets may see BOE take a more solid stance as soon as the Financial Policy Committee’s next policy announcement on July 5 while monetary stimulus would be teed up at the next decision on July 14 in time for its following meeting on August 4.
Related: U.K. ETFs, FTSE 100 Rebound After Brexit Sell-Off
The BOE has maintained a record low 0.5% rate since March 2009.
“We expect lower rates will be sanctioned at the early August meeting,” George Buckley, an economist at Deutsche Bank, told Bloomberg. “Carney also suggested against using negative rates, which supports our view of rates falling to 0.10 percent then QE. A preemptive loosening at the July meeting cannot be ruled out.”
For more information on the British markets, visit our United Kingdom category.
WisdomTree United Kingdom Hedged Equity Fund