Rate Hike of no Benefit to Sterling

Desperate times lead to desperate measures

It is now a couple of weeks since the Bank of England raised interest rates for the first time in ten years. It would be interesting to find out if, with the benefit of hindsight, the members of the MPC believe they made the right decision.

Mark Carney’s rather weak affirmation that inflation wasn’t going to fall without some monetary policy intervention simply adds to the feeling that the MPC fear a further fall in Sterling as Brexit talks come to what appears to be an almost inevitable no-deal conclusion.

Since the hike, Sterling has recovered a little due in the main to the headwinds facing the dollar and euro. It remains susceptible to bad news as any rally simply provides traders with an opportunity to add to short positions.

Yesterday’s retail sales data brought a little relief to those who had feared that the consumer is on the cusp of withdrawing support for the economy as the gap between wages and prices grows. The pound barely reacted to the news that retail sales grew by 0.3% month on month in October although they were lower by a similar amount year on year.

It remains to be seen what effect the rate hike is going to have on inflation, but some action is needed to encourage wage growth since employment is, apparently, at 40-year highs despite this week’s slight fall.

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Stating the obvious

As the former Chancellor turned newspaper editor and political commentator, George Osborne likes to point out, prior to the Brexit vote, the U.K. was the fastest growing economy in the G7. It doesn’t take a particularly sharp mind to figure out that all that currently ails the U.K. is as a direct result of that vote.

It is pointless to carry on with the “if it wasn’t for Brexit” rhetoric since the Government and the wider Parliament is charged first and foremost with carrying out the will of the people. It can, and will, be argued, of course, that the Brexit decision is not necessarily the will of the people since remainers plus those who chose not to vote make up the majority.

Brexit has driven the pound lower and pulled the rug out from under an economy that was, as already stated, growing at an impressive rate. The pound has steadied as the news of the hike has been digested and has arrested a weekly slide that started in late September.

A period of consolidation is now probable, certainly as the market quietens with the approach of the end of the year. Finance Directors will be turning their thoughts towards 2018 and what the New Year will bring. Unfortunately, until there is Brexit clarity business investment will remain clouded by doubts and worries.

US monetary policy also turning subjective

It is an ill wind that blows nobody any good! The emergence of the global economy and, by definition, that of the United States from the doom-laden period following the financial crisis has given Central Banks headaches as they decide on the best course of action to ensure that growth remains positive, yet inflation stays under control.

The U.S. is baying for a return to normality and the FOMC is trying to justify withdrawal of stimulus and a regularization of monetary policy. However, and this is true for the Eurozone as well, since inflation is benign at best, surely leaving accommodation in place for as long as possible to stimulate growth is what is needed.

That is the question facing the FOMC who meet on December 12 and 13. There is a growing number of FOMC members, if this week’s speeches are anything to go by, who are reconsidering their position in the light of this week’s inflation data. The dollar index has fallen as doubts about a hike creep into traders thoughts.

This has been a tumultuous week for data with all the G7 economies left with plenty to consider but it is becoming ever more clear that interest rate policy is back at the number one driver of currencies in the medium to long term.