Tag Archives: UK Economics

Barbarians at the Sterling Gate

Sterling’s collapse overnight has eclipsed somewhat tepid US labour market data.

The net result is that the Sterling NEER has weakened a further 2% since yesterday and is now down about 20% since November 2015.

While trading desks will have a far better grasp of how risk management systems and liquidity contributed to sterling’s drop, recent political decisions and UK data clearly helped set the scene and will leave the currency vulnerable going forward.

Theresa May’s government and EU leaders have in recent weeks successively dismantled the raft of hopeful predictions which had helped Sterling stabilise over the summer.

Moreover, there is growing evidence that a more competitive Sterling has not translated into materially stronger UK industrial output or exports, with the UK’s trade deficit in goods and services widening in recent months

I would reiterate my view, expressed in early July, that the uncertainty associated with the UK’s possible exit from the EU will likely continue to weigh on the UK economy and currency.

This week’s fall in sterling, if anything, has reinforced my view that the Bank of England will maintain a dovish rhetoric but for now refrain from cutting its policy rate to zero or expanding its current QE program.

Moreover I would not expect the BoE to intervene in the FX market to support sterling at this stage. Read more

Bank of England rate cut – Seven years in the making

For the past few years, the Bank of England’s MPC meetings have been pretty straightforward affairs, with the policy rate firmly on hold at its record low of 0.5%.

But the referendum result has dramatically changed the British political landscape and amplified the uncertainty over the near and long-term outlook for the UK economy.

A 25bp rate cut today is perhaps not quite the foregone conclusion which markets are almost fully pricing in. The BoE could today make valid arguments both to support a 25bp rate cut and no change.

On balance, however, I think the BoE has more compelling reasons to cut its policy rate 25bp today than to leave it on hold.

First, BoE Governor Carney has made clear that a rate cut was potentially on the cards, making it harder for him to backtrack.

Second, the British economy was showing clear signs of weakness even before the referendum.

Third, there are signs that economic and political uncertainty post referendum are already having a negative impact on consumption, investment and confidence.

Finally, the BoE may be the only game in town for now as there is limited room for domestic fiscal policy and global monetary policy reflation.

But cutting the policy rate to 25bp or even zero is clearly no panacea to the challenges which the UK faces in coming weeks, months and perhaps even years and there are valid counter-arguments as to why the BoE may leave its policy rate on hold today.

These include that the BoE should save its (limited) bullets and wait for more hard data, a BoE rate cut would set in motion self-fulfilling prophecy, the BoE should balance post-referendum chaos with a steady policy rate, the global equity market rebound has removed the sense of urgency and a rate cut could trigger uncontrolled Sterling depreciation.

Regardless of today’s decision, the BoE’s accompanying minutes will likely try to capture this new paradigm.

A rate cut today would still leave the BoE the option of cutting rates again at its 4th  August meeting but negative interest rate policy and/or quantitative easing are still likely to be measures of last resort. Read more