Rate Hike Doubts hit Sterling
October 18th: Highlights
- Inflation hits 3%
- MPC Members see inflation abating in coming months
- OECD calls for Brexit rethink
Tenreyro dovish about rate November hike
Ms. Tenreyro also said in comments yesterday that it is her view that the effect of a weak currency will wane in the coming months and consequently inflation will fall. She is therefore not ready to vote for an interest rate hike at the MPC meeting on November 2nd.
Yesterday, as expected, headline inflation hit 3%. This was a month before the Quarterly Inflation Report predicted it would reach that level. It also predicted that 3% would be the peak but already models are predicting 3.2% for the October data. Sterling fell following Tenreyro’s comments reaching lows of 1.3154 and 0.8932.
Deputy Governor continues dovish theme
Hopes for a rate hike that have underpinned the currency in the past few weeks are starting to fade. Ramsden said he was not one of the majority of MPC members who feel that a rate hike will become necessary in the coming months.
There are two confirmed hawks who will vote for a hike; Michael Saunders and Ian McCafferty and three doves in Vlieghe, Tenreyro and Ramsden. The BoE’s Chief Economist, Andrew Haldane has said in the past that he is beginning to favour a hike and his view is balanced by the Governor Mark Carney who favours holding off. That leaves Broadbent and Cunliffe, whose current intentions are unclear. A 5-4 vote in favour of remaining on hold would provide support for Sterling as traders would see this as confirmation that a hike is coming.
OECD says all U.K.’s woes linked to Brexit
He will have been less than impressed with the OECD who yesterday commented in an official report that the U.K. would receive a “substantial boost to its economy” were it to reconsider Brexit. They said, “A new referendum or a change of government leading to the UK staying within the EU would have a “significant” positive impact on growth. It went on to say that Brexit is a major concern for the future of the U.K. economy, citing a probable fall in the country’s credit rating leading to higher rates and a considerable drop in inward investment.
It is hard to imagine a scenario where there could be a second referendum without a major concession from Brussels. A hard Brexit is becoming more and more likely as the deadlock over the budget payment continues and the clock ticks down.
Europe facing political problems it wasn’t designed to solve
This will have negligible effect on the economy which is far from harmonized although growth is returning to all parts of the region. Confirmed Europeans like the Dutch PM Mark Rutter and Emmanuel Macron, the French President will need to rein in their ambition until the political landscape becomes more favourable.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”