Bank fights back
With cuts in interest rates to fresh 322 year lows and a slew of new policy measures, yesterday saw the Bank of England take a step forward in attempting to make Brexit work for the UK. While its first set of forecasts post-Brexit do not see the UK economy falling into a recession but they are sufficiently moved to loosen policy by more than markets had initially thought.
There had been some doubts in the past few days that the data picture may not have given the Bank enough insight for them to begin a policy of stimulus; these were wrong and the combination of interest rate cuts, quantitative easing spending, including a corporate bond buying program, and a new funding scheme for banks make this a policy toolkit that is set to dig the UK economy out of any mire it may fall into as quickly as possible.
The 6 members of the MPC who voted for all the stimulus are treating the battle against a post-Brexit slowing of the UK economy like a street-fight; hit them first, hit them hard and make sure they don’t want to get up. This move by the central bank is that first punch.
While GDP has been revised lower, inflation has naturally been revised higher on the basis of a weaker sterling. If our calls of GBP/USD coming lower to 1.22 by the end of the year are correct then inflation will spike above 2.5% next year but calendar effects should allow the Bank of England to keep its foot on the stimulus pedals.
Over to you Westminster
One thing that was easy to pick up on from Carney’s press conference was that while the Bank of England can support the economy, the Brexit vote has structurally changed the UK economy and that fiscal changes are needed too.
Chancellor Hammond, in his letter to Governor Carney, said that he’s ‘prepared to take any steps to support the economy’ and we would hope that the refocus of the UK fiscal stance would allow for lower taxes and increased investment.
As someone who will soon be paying for a wedding, I would like to see a juicy cut to VAT in Hammond’s Autumn Statement, that while scheduled for November, he would do well to bring forward.
More to come from the bank and for the pound
Sterling has fallen, but not collapsed, in the aftermath of the announcement and we maintain our calls for tests of the post-Brexit lows of 1.2798 in GBP/USD and 1.1592 in GBP/EUR in the coming weeks.
We also believe that more will come from the Bank of England and the base rate will likely bottom out at 0.1% in the coming quarters given the pressures on banking, pension and insurance models from anything lower than that.
US payrolls to remain supportive of December rate hike
On the other side of the pond, things are remarkably calm and while we are plumbing new policy rate lows here in the UK, we can easily see a supportive number from the US jobs market today that reignites market belief of a Fed hike in December of this year.
The average gain over the past 12 months has been 204,000 jobs a month and while today can easily continue this trend, the key focus has to be wages. 2.6% is little more than okay but the trend is encouraging and recent spending and consumption numbers point to a workforce that are increasingly confident about their working conditions.
We are still looking for a rate hike in December of this year as trend growth rebounds from the poor initial reading of Q2 GDP.