The BoE’s Monetary Policy Committee announces the outcome of this week’s meeting today. The strong consensus is for no change, which would leave the repo rate at 0.75% and QE totals unchanged, though there is a chance that we’ll see dovish dissent amid the ranks of the nine-member committee, with members Saunders and Vlieghe having recently voiced concern about the damage that Brexit uncertainty is doing.
Most members look to prefer to remain on hold into the December general election. Both of the principal parties in the UK, the Conservatives and Labour, are pledging fiscal spending if they are elected, which won’t have gone unnoticed by the MPC.
The BoE will also release its quarterly Inflation Report, which isn’t expected to show much change to existing projections, although it is clear that the prolonged uncertainty is increasingly damaging the outlook and has already led to a sharp decline in investment. London markets are pricing in about 45% odds for a 25 bps rate cut by next May, and an 85% chance for such a move by the end of 2020.
Meanwhile….UK’s December Election on December 12!
The divided parliament finally threw in the towel and the UK is now heading for a general election on December 12 to try and break the deadlock on the Brexit front. It is a risky move for Johnson, who so far has been rejecting the advances of the Brexit party, which is campaigning for a no-deal scenario and if Johnson continues to hold out there is the risk that not just the anti-Brexit, but also the pro-Brexit vote will be split.
That means another split parliament cannot be ruled out and if the Brexit party were to gain a sizeable number of seats it would increase the pressure on Johnson to go ahead with a no-deal scenario.
In any case, Johnson has pledged to stick to the current time table for the transition period, which will give him just a year to get a trade deal with the EU wrapped up. Even if Johnson’s ambitions on that front are not as high as May’s this seems an impossibly short time to get a meaningful arrangement wrapped up. In any case, Johnson’s deal looks set to involve nothing like the “friction less” trade that UK manufacturers will be looking for and border checks will likely still disrupt supply chains across Europe.
And GBP waiting for Brexit resolution
From month-ago levels, the Pound is the strongest performer out of the main currencies, up 5% against the Dollar and by over 6% versus the Euro. The gains reflect an unwinding in the Pound’s Brexit discount, with a Halloween no-deal Brexit scenario having been avoided.
The broad trade-weighted measure of the Pound is expected to retain at about a 8-9% discount relative to levels prevailing ahead of the July 2015 Brexit vote, which has been pared back from lows of 15%-plus. As the UK now finds itself with Brexit delayed for a second time, and once again in a quagmire of political uncertainty, no significant unwinding is anticipated for Sterling’s Brexit discount as all options remain open with regard to how Brexit is resolved — ranging from no deal to Brexit cancelled, depending on the results of the December 12 general election and any referendum after the election.
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Andria Pichidi
Market Analyst
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